An asset allocation strategy represents personal risk management decisions about how much of your portfolio to allocate to various investment categories, such as stocks, bonds, cash, and other alternatives.
When stock market returns remain positive for an extended period, investors don't have much interest in their portfolio’s asset allocation. At the time, the best strategy seems to be to owning solely stocks. But when the market declines, investors start looking at asset allocation. Some of the advantages of an asset allocation strategy include:
- Providing a disciplined approach to diversification. An asset allocation strategy is another name for diversification, an important strategy for reducing portfolio risk.
- Encouraging long-term investing. An asset allocation strategy is designed to control your portfolio's exposure to each asset class. It should not change based on economic conditions, political races, or market fluctuations.
- Reducing the risk in your portfolio. Investments with higher expected returns typically have higher risk and more volatility. Asset allocation combines various aggressive and less aggressive investment options. This combination can help reduce your portfolio's overall risk.
- Adjusting your portfolio's risk over time. Your portfolio's risk can be adjusted by changing allocation percentages for the different investments you hold. By anticipating changes in your personal situation, you can make those changes gradually.
- Focusing on the big picture. Staying focused on your asset allocation strategy will help prevent you from making rash decisions with your portfolio. Rather than investing in a haphazard manner, it gives you a framework for how your portfolio should be allocated to meet your investment goals.
If you have questions about your portfolio’s asset allocation, contact your advisor today.
FAQs
What are the advantages of asset allocation? ›
By including different asset classes in your portfolio, you increase the probability that some of your investments will provide satisfactory returns even if others are flat or losing value. Your asset allocation will depend on a number of factors, including your risk tolerance and your investment horizon.
Is asset allocation fund good? ›An asset allocation fund attempts to create an optimal portfolio given an investor's risk tolerance. Asset allocation funds come in potentially endless variations. The funds will all seek optimal diversification, but they all have different mixes of asset classes and follow unique internal rules.
What is asset allocation Quizlet? ›Asset allocation. The process of allocating money across financial assets (such as stocks bonds, and mutual funds) with the objective of achieving a desired return while maintaining risk @ a tolerable level.
What is the best asset allocation strategy? ›Finding the right mix for your portfolio. One of the first things you learn as a new investor is to seek the best portfolio mix. Many financial advisors recommend a 60/40 asset allocation between stocks and fixed income to take advantage of growth while keeping up your defenses.
What are the three important elements of asset allocation? ›The three main elements of asset allocation are essentially equity, fixed income, and gold. Diversifying money across these three asset classes balances the risk-reward ratio of the investment portfolio. It is generally seen that these asset classes do not move in tandem with each other across different market cycles.
What is the primary purpose of asset allocation? ›Asset allocation refers to distributing or allocating your money across multiple asset classes, such as equity, fixed income, debt, cash, and others. The primary purpose of asset allocation is to reduce the risk associated with your investment.
What is the best asset allocation for my age? ›The common rule of asset allocation by age is that you should hold a percentage of stocks that is equal to 100 minus your age. So if you're 40, you should hold 60% of your portfolio in stocks. Since life expectancy is growing, changing that rule to 110 minus your age or 120 minus your age may be more appropriate.
Do asset allocation funds provide income? ›These funds allocate a specific amount to fixed income and equities depending on the fund's goal. They typically offer income and growth potential in one fund. Most asset allocation mutual funds have a stated target for the amounts invested in fixed income and equities.
What is the best asset allocation for 401k? ›401(k) Portfolio Allocations by Risk Profile
- An aggressive allocation: 90% stocks, 10% bonds.
- A moderately aggressive allocation: 70% stocks, 30% bonds.
- A balanced allocation: 50% stocks, 50% bonds.
- A conservative allocation: 30% stocks, 80% bonds.
Asset allocation is how investors split up their portfolios among different kinds of assets. The three main asset classes are equities, fixed income, and cash and cash equivalents. Each asset class has different risks and return potential, so each will behave differently over time.
What is asset allocation with example? ›
Asset allocation involves dividing your investments among different assets, such as stocks, bonds, and cash. The asset allocation decision is a personal one. The allocation that works best for you changes at different times in your life, depending on how long you have to invest and your ability to tolerate risk.
What is asset allocation best defined as? ›Asset allocation is the process of dividing the money in your investment portfolio among stocks, bonds and cash. The goal is to align your asset allocation with your tolerance for risk and time horizon. Broadly speaking, the three main asset classes are: Stocks.
What are 3 advantages of asset allocation? ›The Advantages of Asset Allocation
- Providing a disciplined approach to diversification. ...
- Encouraging long-term investing. ...
- Reducing the risk in your portfolio. ...
- Adjusting your portfolio's risk over time. ...
- Focusing on the big picture.
At age 60–69, consider a moderate portfolio (60% stock, 35% bonds, 5% cash/cash investments); 70–79, moderately conservative (40% stock, 50% bonds, 10% cash/cash investments); 80 and above, conservative (20% stock, 50% bonds, 30% cash/cash investments).
What is the 4 rule for asset allocation? ›It's relatively simple: You add up all of your investments, and withdraw 4% of that total during your first year of retirement. In subsequent years, you adjust the dollar amount you withdraw to account for inflation.
What are the benefits of allocation? ›An effective allocation system will optimize utilization rates without overburdening your people. Effective allocation methods will also prevent other capable and available resources from being overlooked, ensuring tasks are assigned fairly and strategically.
What is the power of asset allocation? ›Asset allocation divides your hard-earned investment into various asset classes and gives you the potential to earn higher returns while lowering the risk by diversification. All asset classes don't move at the same pace or in the same direction and that's why having the right mix is important.
What are the key benefits of resource allocation? ›Benefits of Resource Allocation
- Boosts efficiency. Effective resource allocation means that each team member is given appropriate resources and tools to help them work more quickly and efficiently, increasing business productivity. ...
- Improves team morale. ...
- Improves cost reduction. ...
- Boosts collaboration.
There are both advantages and disadvantages of allocation.
- Advantage: Allocation Based on Department Need. ...
- Advantage: Companywide and Department Allocation. ...
- Advantage: In-Depth Cost Management. ...
- Advantage: Better Department Strategy. ...
- Disadvantage: Variable Costs Pose Challenges. ...
- Disadvantage: Actual Usage Can Go Under Budget.