What is Asset Allocation?

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What is Asset Allocation?

 

Asset allocation is the process of developing a customized, diversified investment portfolio by strategically mixing different asset classes in varying proportions.

 

Asset allocation is based on the principle of diversification, but takes the process one step further.

Diversification spreads money across different investments.

 

Asset allocation, by strategically diversifying a portfolio among different asset classes, potentially offers investors a double advantage:

 

· To benefit from changing market cycles

· To reduce overall portfolio risk by offering a higher degree of diversification

 

Asset allocation therefore aims to reduce the "ups and downs" associated with investing and makes it easier to stick with investors' long term investment objectives and avoid market timing.

 

Ultimately, the objective of a good asset allocation plan is to develop an investment portfolio that will help you reach your financial objectives with the degree of risk you find comfortable. A well diversified plan will not outperform the top asset class in any given year, but over time it may be one of the most effective ways to realize your long term goals.

 

What are the different Asset Classes?

 

An asset class is a group of economic resources sharing similar characteristics, such as riskiness and return.

 

There are many types of assets that may or may not be included in an asset allocation strategy.

 

Traditional

 

Assets - The "traditional" asset classes are:

 

· Stocks: Large - cap,  mid - cap, small - cap or micro - cap; domestic, foreign (developed), emerging or frontier markets

 

· Bonds (fixed income securities more generally): investment - grade or high - yield; government or

corporate; short - term, intermediate, long - term; domestic, foreign, emerging markets

· Cash and cash equivalents (e.g., deposit account, money market fund

 

Allocation among these three provides a starting point. Usually included are hybrid instruments such as convertible bonds and preferred stocks, counting as a mixture of bonds and stocks.

 

Alternative Assets

Other alternative assets that may be considered include:

· Commodities: precious metals, nonferrous metals, agriculture, energy, others.

· Commercial or residential real estate (also REITs)

· Collectibles such as art, coins, or stamps

· Insurance products (annuity life settlements, catastrophe bonds, personal, life insurance products, etc.)

· Derivatives such as long - short or market neutral strategies, options , collateralized debt, and futures

· Foreign currency

· Venture capital

· Private equity

 

Mutual fund investments are subject to market risks, read all scheme related documents carefully.

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