Asset Allocation and Portfolio Diversification – When you are making your portfolio, asset allocation is a key decision that you will need to consider. Your asset allocation strategy will probably change as you get older. That is why portfolio diversification is a process, not a single, time-consuming decision.
Younger investors tend to put more of their money into stocks because they have more time in the market to offset the risk. However, as we age, our portfolio asset allocation will shift toward bonds. This is because we have less time in the market to recover from stock market downturns.
Diversification
When investing in stocks, bonds, and other types of financial instruments, you want to diversify across different asset classes. The way you allocate your assets will determine the long-term volatility of your portfolio.
While most investors start with stocks and bonds, some investments combine elements of several asset classes. While it may be tempting to buy all of one asset type, it is better to mix it up a bit. Here are some tips for diversifying your portfolio.
While the academic definition of diversification suggests that investing in a variety of assets reduces the risk of market fluctuations, this is not always practical for the retail investor.
Diversification in asset allocation can help multi-asset investors combat today’s challenges, which include depressed investor sentiment, a slowdown in the global economy, and interest rate rises. By keeping a few different types of assets in your portfolio, you’ll be able to manage risk and achieve your financial goals.
Investing in safe assets
Safe assets, also known as “safe havens,” are investments that do not carry a high risk of loss over a long period. They are typically viewed as better investments than cash and government bonds.
These investments can provide the investor with a stable income during a period of market volatility. For investors who are looking to diversify their portfolios, investing in safe assets may be the best way to go. Here are a few reasons why safe assets are better investments than cash:
First, safe assets have a history of maintaining their value over time. Some people like to invest in items that have long been in demand. Investing in historical-valued items can be a safe bet, but this is highly dependent on current tastes.
For example, if the green initiative starts crushing car prices, the demand for watches will drop. If the trend for green cars continues, the value of watches could be wiped out overnight.
Age-based asset allocation
There are several advantages to age-based asset allocation strategies. Unlike enrollment-date funds, which change with the market, age-based funds have a track record of consistent performance.
This means you can evaluate the funds’ performance and compare the past with the present. You can also check the fund’s performance on research sites like Morningstar or similar ones. The following are three reasons to use age-based asset allocation strategies:
This strategy is popular with retail financial advisors. Most client-facing professionals are salespeople who barely understand the difference between appreciation and yield. They also have limited knowledge of advanced portfolio techniques.
Using an age-based approach to investment strategy creates a natural flow of trades and commissions. Therefore, age-based asset allocation strategies may not be for everyone. However, they may be useful for certain individuals. They should seek out a new advisor if their firm makes money from personal coverage.
Rebalancing your portfolio
Rebalancing your portfolio involves selling high-performing investments and adding new money to the portfolio. This process is automatic with some employer-sponsored retirement plans, Robo-advisory services, and your portfolio.
However, you can choose to perform this task manually or entrust it to a professional. Either way, it is vital to understand the basics of rebalancing your portfolio. To begin, make a list of all of the assets you own, and what they do for your portfolio’s performance.
Rebalancing your portfolio periodically is an important way to ensure that your asset allocation matches your long-term financial goals. It will also help ensure that your portfolio does not become out of sync for long periods.
This can happen when your investment goals and risk tolerance change, and you don’t make the necessary adjustments to your portfolio. When rebalancing your portfolio, you need to consider the kind of account you have, and the amount of time you have owned it. Standard investment accounts have different tax treatment than tax-advantaged accounts.
Investing in emerging companies
The Spokane Angel Alliance is one of the leading angel investor groups in the Spokane area focused on investing in emerging companies in Eastern Washington, Idaho, and Montana.
The organization’s members comprise more than 100 individuals and meet six times a year. As a group, SAA has invested over $65 million in 60 startups in the Spokane area. The group’s investment philosophy is based on its belief that investing in emerging companies will produce superior returns.
Investments in developing countries aren’t for everyone. There are many risks and rewards, but investors should be aware that the growth potential outweighs the associated risks. Despite their relative lack of liquidity, emerging markets often provide high returns, even if they are still underdeveloped.
If an investor can identify the right emerging company, they may experience tremendous gains. The risks are sometimes understated, but if done properly, investing in emerging markets can yield great returns.
Moderate risk
When it comes to asset allocation, moderation is the key word here. A moderate risk portfolio is not reckless, but it does not necessarily mean you should avoid stocks or bonds that are riskier than they are. Investing in these funds will generally mean that you’re taking some short-term notional risks, and your losses will be small.
A moderate risk portfolio should hold a mix of large-cap stocks, mid-caps, and small-cap stocks. If you’re unsure of where to start, 70 percent large-cap stocks, 20 percent mid-cap, and ten percent small-caps is a good starting point.
The level of risk you’re willing to accept depends on several factors, including your age, industry, liabilities, dependents, and current investments.
Most investors underestimate the role of alternative investments in their portfolios, including gold and other commodities, hedge funds, absolute-return funds, and real estate. But while diversification is a key element of asset allocation, it doesn’t guarantee a steady increase in wealth.