Investing is not a simple activity, and yet anybody can, and should be an investor. You don’t have to be an expert in order to make your money work for you in the stock market. There are, however, a few important concepts that every investor should know.
Why asset allocation is important
Shaye Hirsch is a Hedge Fund Manager and Founder of Brio Capital Management LLC. According to Hirsch, there are a few things to have checked. Having some kind of a safety net in your investments is the most important thing you can do to protect your portfolio. The key to effective portfolio management is the long-term mix of assets. Asset allocation is the best way to incorporate this principle into your investment selection process.
Asset allocation is an investment strategy that aims to balance risk and reward. It does so by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance, and investment horizon. The three main asset classes – equities, fixed-income, and cash and equivalents – have different levels of risk and return. And over time, each of these will behave differently.
Types of assets for allocation
Investing in individual stocks or bonds leaves you vulnerable to the risk that the particular investment could go down in value. Broadly speaking, asset allocation is the practice of dividing resources among different categories. Such are stocks, bonds, mutual funds, investment partnerships, real estate, cash equivalents, and private equity. This way investors can lessen risk because each asset class has a different interaction with the others. For example, when stocks rise, bonds often fall. Asset allocation helps optimize the risk profile by investing in a mix of assets that have a low correlation to each other.
Establishing an appropriate asset mix is a dynamic process. It plays a key role in determining your portfolio’s overall risk and return. A sound asset allocation strategy ensures your investment portfolio is diversified enough to meet your savings goals without unnecessary risk.
Monitoring and rebalancing your portfolio
As Shaye Hirsch explains, the main point of asset allocation is to broadly diversify your investment portfolio. This is to ensure you get a return on your money while managing risk. Proper asset allocation will give you an ideal mix of investments that will get you the greatest long-term gains for a tolerable amount of risk.
Investors often use different asset allocations for different objectives. For example, a person who is saving for a new car in the next year might invest his car savings quite differently than another individual saving for retirement. Choosing an appropriate asset allocation depends on two things. One is how long you have to invest, and the other is how much risk you can tolerate, adds Shaye Hirsch.