Asset Allocation Basics
If you are thinking about the allocation of your assets then you must look at the whole picture and this must be reassessed on a regular basis, at least once a year. It will mean that you are able to check that your investments are heading in the right direction; it also means that if something is not going well you have time to re-think the area of investment.
Asset Allocation Basics- Asset split
If you are considering your options you must consider the amount of risk that you are prepared to take and the proportion of your capital that you are willing to risk at a higher rate. It is important that you don’t put all of your capital into high risk ventures and you keep a proportion for less risky options.
Asset Allocation Basics – Areas of investment
You need to consider all areas of investment.
- Savings
- Stock market
- Housing market
- Investments
It is only when you make a plan for all your money that you will understand the true value of the correct asset allocation, you need to have covered the savings aspect and have an emergency fund so that any investments that you do have are allowed to mature and the capital that you have invested is not withdrawn prematurely.
Asset Allocation Basics – Stock market
If you are looking to invest in the stock market then you will need to look at the different aspects. You need to add your age into the equation as to the amount of capital that you put into the more risky options.
The closer that you are to the retirement age then you should risk less of your capital than if you are in your twenty’s. This is because the younger that you are you have more time, in theory, to make up your capital if you lost it on an investment. This is possible on the stock market because there are no guarantees that any of the investments are going to make you money. This is due to the risk that every investment on the stock market takes; there are options that are less risky.
The options that have less risk have the lower rate of return for the money invested the more risk that the option has the higher the return that you will get. This means that you are able to make a quicker rate of return and potentially increasing the capital you invested. The safe investments can also lose money, but they are considered the safest option and they can mean that you can protect a proportion of your capital.
The best proportion of your capital to hold in safe investments depends on your age, a twenty year old should invest a maximum 8o% of their capital in more risky investments and they must protect at least 20%. A forty year old would have to invest 40% of the capital that they have available into the less risky options. This is because there are fewer years that they have left before they need to start investing.
Asset Allocation Basics – About the author
Sharon Rowe is the Senior Editor at Growing Money, a financial blog that helps readers learn to invest and make money.
