Asset Allocation as an Investment Strategy

“In a perfect world we don’t want to be overly dependent on any single asset or be so dependent on the cycle or where one asset is the bulk of this company.” -James Packer

Asset allocation is an investment strategy which helps investors create balance and variety in their investment portfolios. Asset allocation and diversification are often used interchangeable however, they are two separate techniques. Diversification refers to dividing investments up into different industries and sectors. Asset allocation refers to the process of dividing assets up into major categories like stocks, bonds, cash, and real estate. This is important because each type of investment has its own rate of return and its own risk. Each will behave differently and be influenced by different economic factors. A solid investment plan will use both diversification and asset allocation to create a productive and fruitful investing environment. Determining and customizing your investment plan with the right mix of stock vehicles is the most important decision you will make as an investor.

Where to Begin? The first step is to figure out in what proportion will each of the investments types exist in your financial plan. Most financial advisors agree that at least 40% of your portfolio should be investments in stocks. While 20% should be in long term investments like mutual funds and bonds. The other 40% should be invested in high yield stocks which have higher risk and therefore the potential for higher profit.

However, risk levels are different for each individual investor and should be researched fully before making a decision. The specific industry of the stocks or bonds you are invested in is actually less important then the way you have your investment types divided up in low to high risks options, long or short term bonds, or the amount of available cash.

Asset allocation is extremely specific to the individual. While asking for advice from family and friends is a good place to begin your research about asset allocation never assume that your friend’s asset allocation plan would work for you. Unfortunately, there is no simple equation which can determine what type of allocation is best for you or your risk level. A financial or investment advisor will be able to lead you through the decision making process.

Asset allocation can be a fun and exciting part of your planning process, so enjoy it! Make sure you to take the time to do plenty of research and reflect on what is best for you. Another factor which can influence your asset allocation is your short and long term goals. For example, if you are saving for retirement and can afford to place money into funds, which have less liquidity, then it is probably a good idea to invest more into mutual funds and bonds. However, if you have capital to invest now but in 1 year you will need for a down payment on a house, publicly traded stocks are a better option because they offer more liquidity.

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