Every investment avenue has an inherent risk-reward ratio. Now it is upto the investor to choose the right investment option that fit their needs. There are different types of assets like property, debt securities, commodities, real estate, gold etc and every investor comes across a phase where he thoroughly evaluates returns against the risk associated with each class.
He gets engulfed in questions like how much to invest in a particular class of asset, whether to book loss or profit or when to enter or exit from an asset etc. Taking such decisions is an arduous task. Here comes asset allocation in the picture. It is an answer to all these puzzling questions related to investment.
Asset allocation in simple terms means, the allocation of money in diverse assets keeping in mind risks and returns related with each class. Asset allocation is aimed at creating the judicious mix of investment avenues with the view to maximize returns and minimize risk. Basically it is the division of wealth amongst different investment categories. It is done by keeping risk appetite of an investor in mind.
When it comes to long-tem financial planning, asset allocation is a means to an end. Diversification is the essence of asset allocation. The entire process works on the principle of diversification because different assets behave differently within same market conditions. Therefore, it combats the overall volatility.
Since now you know what asset allocation is all about, let’s contemplate important factors to keep in mind while framing a sound asset allocation strategy-
Define your goal
To begin with the process of chalking out a sound asset allocation strategy, define a financial goal. Until you are aware of the purpose for which you are investing, it is absolutely of no use to allocate money. A goal may be short, medium or long-term in nature depending upon the availability of money and future needs of every investor. One should know why and how much money one needs in the long run. Only then can he frame a clear, concise and sound strategy.
Identify your risk-appetite
The next step is to identify your risk-appetite. One has to identify whether he is someone is risk-averse or has a bullish bent of mind. Knowing your risk-appetite before investing is very crucial for your financial health. Though asset allocation depends upon a number of factors but being acquainted with one’s risk-profile is extremely important.
Other significant factors
Apart from risk-tolerance factor, there are many other significant factors that also play a great role in deciding the strategy of asset allocation. These are liquidity requirements of a person, return expectations and time horizon of keeping investments intact. All these are subjective things and vary from person to person. So, one has to take these into consideration for the accurate strategy of asset allocation.
Periodically review your strategy
Making a strategy may be a one-time task but it needs a periodic review. This is done to make sure that the strategy which is framed is in fine tune with the parameters set in the first place. Also, it is important to conduct a periodic review to detect any deviations or to see if any revision is required to bring it on the track. Rebalancing your asset allocation strategy as per the market conditions is very important to extract maximum returns. Moreover, frequent evaluation of your portfolio ensures that your strategy is working in your favor.
There are many asset allocation strategies based on things like rebalancing, sector rotation, speculative nature of the mix and expectations of the investors. But all these aim at only one thing which is creation and management of wealth. There is no any hard and fast rule of formulating a strategy and no set standards of making it. It solely depends upon the personal choice of the investors and variables like future goals, age, risk-tolerance etc.
Sometimes an individual is not able to formulate the right working strategy for himself so he can always take help of professionals in this regard. They are thorough experts of the field and create strategies on sound logics and deep analysis of market trends.
If you are looking for experts to chalk out a great asset allocation strategy for yourself, contact and multiply your money!