05) Financial Concepts: Asset Allocation

by · October 6, 2010

An investor planning long-term investments should have a portfolio comprised chiefly of stocks, since it is no secret that common stocks lead most other financial instruments in performance. Investors who do not wish to invest for long periods must diversify their portfolio by adding investments other than stocks. It is for this reason that asset allocation was invented. The aim of asset allocation is to balance risk and create diversification. This is done by distributing assets among major groups such as bonds, stocks, cash, and real estate. As each group has different levels of return and risk, behavior will be different over a period of time. One asset may increase in value while another may decrease.

The principle behind asset allocation is that the older you get, the less risk you should take. After retirement, you may have to depend on savings alone as source of income. It is therefore practical that investment is more conservative, as asset preservation is critical at this time of your life.

It is important that your portfolio has the proper mix of investments. You must decide what amount should be put in mutual funds, stocks, bonds, and treasuries. This is not particularly easy especially for those nearing retirement age. One might find that after saving for 30 years, the stock market suddenly declined just before you retire. It is for this reason that we recommend an investment advisor who is able to make a customized plan for you!