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Investment Asset Allocation

Asset allocation represents the diversification of resources among different types of investments. An investor can disperse his money among such investment classes as:

  • mutual funds
  • stocks
  • bonds
  • real estate
  • private equity
  • investment partnership
  • cash equivalence

By allocating assets among several categories of investments, the investor significantly reduces the risk of sustaining great losses. This is so, since the different categories of investment relate in different ways to each other. This means that if the price of one investment falls the decrease will be compensated by an increase in another investment category. For example, a decrease in stocks will be alleviated by an increase in real estate.

Investors can choose among various asset allocation models. The latter represent the main factor that influences the worth of the total portfolio of the investor.

Risk tolerance and the specific goals of the investor represent the main factors that are taken under consideration when designing the particular asset allocation model. The particular allocation can be divided into different sectors. Depending on the percentage of the total portfolio required to be invested in a specific investment type, further recommendations can be made on the other types of investments to be included. For example, if you are portfolio should hold 35% in stocks, different percentage proportions of large-cap, banking or manufacturing investments may be given as possible options to supplement the remaining part of the portfolio. The important thing is that these supplementary investments are within the stock class.

Many financial advisors recommend purchasing stocks as contrasted to bond investment. This is so since throughout the investment history, stocks has showed a better performance and being in the position of an owner has proven more beneficial. However, this has been greatly defied during the year 1999, when stocks experienced extreme increase in prices that eliminated the earning yields. Furthermore, stock investment may not be suitable to some of the investors in terms of coincidence with his/her particular goals and strategies.

In order to illustrate such a case consider the situation of a widow, who has inherited one million dollars. She has no other source of income. Her basic goal is to maintain the money she has in order to provide herself with a financially secure retirement years. Therefore, she will look for an investment in which to put a big portion of her inheritance in terms of fixed income obligations. Therefore, a bond investment will be a suitable option for her. As a result she will be able to ensure herself a stable source of income throughout her retirement years.

One the other hand, one can be interested in accumulating wealth. Such a person may be a recent graduate, who is making his/her first steps in the corporate world. Thus, s/he has a stable source of income and can afford market fluctuations. S/he can meet his daily necessities through his/her salary. In such a case the young investor is highly recommended to invest in stocks that satisfyingly meet the conditions of the market.

Asset Allocation Time Adjustment

It is certain that once you have decided on a particular way of allocating your assets you will have to revise it after a period of time. This is necessary, since your way of life changes with time corresponding to changes in your needs. If you are about to experience a major change in your life it is advisable to make beforehand the necessary changes in your asset allocation. For example, if you are about to retire in 10 years, you should consider the option of changing each year 10% of your portfolio into an income model of asset allocation. As a result at the time of retirement, your overall portfolio will exactly match your new needs as a pensioner.

Rebalancing Your Investment Portfolio

Rebalancing of a portfolio should be considered whenever a particular asset class has experienced significant progress. As a result this asset class represents a big portion of the value of the portfolio of the investor. In order to balance the portfolio so that it is again under the conditions of the pre-selected model of asset allocation, a sale of the overperforming assets is needed. The acquired money will be used by the portfolio manager for the purchase of additional assets.

The previous tactic is not always advisable since it may result in lost potentially high returns on the advanced asset class. However there are many examples in which the investor has kept the outperforming assets and sustained great losses.

So, when should you hold the outperforming assets and put up with the occurred portfolio imbalance?

  1. When you are able to make a sound judgment on the business operationally
  2. Don't feel uneasy with the increased dependence on one investment
  3. When the particular assets are still "hot"
  4. When you can identify the competitive advantage of the particular company

Otherwise, consult your portfolio manager for the alternatives you have for the rebalancing of your portfolio.

Supplementary Activities to Asset Allocation

Asset allocation in itself is not enough especially in cases when the investor is not able to make a sound judgment on the quantitative and qualitative aspects of a business. If you are in such a position, address your portfolio manager to offer you defensively selected investments. They should be selected no matter the wealth level and age.

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