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What is Meant by Asset Allocation?

Mr. C.S. Sudheer | Posted On Tuesday, June 24,2008, 08:02 AM

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What is Meant by Asset Allocation?



Asset allocation plays a very important role in the success of any Investors portfolio. Proper asset allocation is the key factor which keeps an Investor as an Investor even after years. My dear readers, today I am here with the detailed discussion on various key factors to be considered for the proper asset allocation, which leads an investor to the success.

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Asset Allocation:

Asset allocation can be defined as an investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance and investment horizon.

In simple words, I can put it like this – Asset allocation is an investment strategy that seeks to balance risk and reward in your portfolio by spreading investments over several types of asset classes. The three main asset classes are equities, fixed-income, and cash and equivalents, and all have different levels of risk and return, so each will behave differently over time. I can call it as the primary tool for achieving an investor’s ideal balance of risk and rewards.

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There is no simple formula that can find the right asset allocation for every individual. However, as a Financial Consultant, I can conclude asset allocation as one of the most important decisions that investors make. In other words, your selection of individual securities is secondary to the way you allocate your investment in stocks, bonds, and cash and equivalents, which will be the principal determinants of your investment results.

Asset-allocation mutual funds, also known as life-cycle or target-date funds are an attempt to provide investors with portfolio structures that address an investor's age, risk appetite and investment objectives with an appropriate apportionment of asset classes. However, critics of this approach point out that arriving at a standardized solution for allocating portfolio assets is problematic because individual investors require individual solutions.

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Strategies for Proper Asset Allocation:

As I discussed above we don’t have any standard rule for asset allocation, however as a financial consultant, I would like to give you the following suggestions out of my experience, which may help you to allocate your investments towards different asset classes successfully:-

  • Consider your investment needs as well as the amount can be invested.

  • Consider the term of your investments.
  • Consider the market movements and market research reports for that period as well as projections for the next few periods.
  • Understand the basics of different asset classes properly.
  • Look for long term and flexible asset allocation strategy.
  • Consult your financial consultant for more updates on the market and economy.

See Also: Basics of Financial Planning

Finally, I would like to end up by saying asset allocation will yield you fruits if you review it on regular basis.

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