Distribution of assets in the investment portfolio
Choosing the right decisions among thousands of stocks, bonds, and mutual funds can confuse even the most experienced investor. But if this is not done, then you can quickly undermine your ability to create capital. Therefore, instead of randomly choosing securities, you need to understand what combination of assets you want to keep. This approach is called prudent asset allocation.
Asset allocation is a method of forming an investment portfolio, which is aimed at balancing possible risk and diversifying investments. Available assets are divided into several categories, such as cash, bonds, real estate, stocks and derivatives. Each asset class has different levels of return and risk, so each will behave differently over time. Some experts see this balance as a recipe for mediocre returns, but for most investors, it’s the best defense against big losses.
A derivative is a financial contract between parties that is based on the future value of the underlying asset. They have been on the market since ancient times, they were derivatives for tulips or rice.
5 Highlights of Asset Allocation
Financial professionals believe that prudent asset allocation is one of the most important decisions investors make. In other words, the choice of securities is secondary to how the assets themselves are distributed. There is no simple formula that can give the correct distribution of assets for each person. But financial experts identify five points that can be considered the most important when allocating resources.
1 Risks and rewards
There must always be a trade-off between risk and return on investment. Everyone wants the highest return, but simply picking the assets with the highest potential is not the right answer.
2 Software and consultants
Do not rely on financial software and the company’s stated plans. Software and questionnaires developed by financial advisers can be helpful, but they should not be completely relied upon. Standard programs do not take into account a lot of important information and cannot determine your financial goals. Investment advisors can only give approximate recommendations, which may not correspond to actual market developments.
3 Setting goals
Clearly define your long-term and short-term goals. Whether you’re looking to build a house, pay for your kids’ education, or simply save money on a new car, you need to consider these issues when you allocate assets. All your goals need to be considered when choosing the right combination. For example, if you plan to buy a house in 20 years, then you don’t have to worry about short-term fluctuations in the stock market. But if you have a child who will be in college in five years, then you need to shift your focus towards safer fixed income investments.
4 Time planning
Having the time allows you to take advantage of accurate plans and increase your total investment. Therefore, a couple of bad years will not affect the final result in thirty years.
5 Implementation of the plans
Once the right combination of securities and other investments is found, it’s time to implement what was planned. It’s pretty easy to track the movement of stocks and bonds, but don’t forget about the classification (short, medium or long term). Mutual funds are more problematic to analyze. Therefore, you need to delve into their prospectuses and find out where they are investing.
There is no single solution for asset allocation, as individual investors require individual solutions. However, a good foundation will be a long-term horizon and the desire to continuously distribute assets in order to get the maximum result.