Asset allocation is a very crucial concept in investment given consistent market volatility, changing income and risk patterns. Asset allocation can be termed as an investment portfolio technique, which is performed with the major objective of balancing risk while creating ample investment diversification. This is done by dividing the assets into major categories, which include equity, bonds, cash, real estate, and derivatives.
Each asset class comprises different levels of returns and risks, which means that each asset class will possess the tendency to behave differently over a given period of time. For example, on one hand, a particular asset class might increase in value and on the other hand, another asset class might either decrease or not increase by much. Most investors consider that this balancing aspect of asset classes provides them with the best possible protection for any major loss, in case things do not go as per plan in a particular investment class or sub-class.
Most financial planners and professional experts in unison believe that asset allocation is one of the most significant decisions, if not the most significant one, that investors will have to take to plan their investment activity. In simple terms, you must make note of the fact that your selection of particular stocks is secondary to the way you allocate your assets to high-risk and low-risk stocks, short-term and long-term stocks, and cash. This process happens on the side-lines.
Like there is no such thing called a perfect stock to invest in, a perfectly successful investment strategy, there is no way in which you can derive a simple and straight forward formula, which could help you identify the ideal asset allocation for each individual. Thus, the help of a professional expert could come in highly handy, since they bring years of experience with them. They can guide you towards your near-perfect asset allocation strategy based on your risk appetite.
So, do not lay all your eggs in one basket, spread your investments based on your risk appetite and enjoy the returns.
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.