Are you wondering how to allocate your assets or money? Are you focused on long term investing or short term?
Regardless of what your investment goals are there is a solution and way of allocating your assets and or money into things that products high returns with minimum risk.
One you learn the basics of asset allocation you can improve your investment returns and hedge against risk or financial disaster.
In this article, I will give you a brief guide to asset allocation and how you can use this to further your investment returns and protect yourself when allocating your money.
The purpose of asset allocation is for an investor to find a way to spread his or her assets into different investments that align with their goals. Below I will cover the following:
-Asset Allocation Overview
-Asset Allocation Strategies
-Data Insights into Asset Allocation
Asset allocation is critical but first you would have to understand how to build wealth and the full picture. For the full picture of how to build wealth this is a must read. “The Complete Guide to Wealth Creation”
Asset Allocation Overview
Asset allocation refers to an investor’s strategy that wants to balance risk and reward by choosing how to proportion their assets based on their overall goal, risk tolerance and investment period.
A quick and easy example is if a person decides to proportion their money or assets this way: 20% cash, 50% stocks and 30% real estate or in any combination.
If this person has $1 million dollars, using this asset allocation example above would look like this: $200K Cash, $500K in stocks and a $300K valued real estate portfolio or anything equivalent.
When choosing your asset allocation it is best first to discovery or clearly identify your investment tolerance or in other words risk tolerance.
Check out this risk tolerance assessment: (Once on page scroll down until you see the image below then click on it and complete it)
This assessment allows you to know your tolerance so this can help you choose an asset allocation tactic that is in perfect alignment with your risk tolerance.
Let me ask you a question? How can a person choose an asset allocation with nothing to allocate or no cash or assets?
Not having money is a big problem so to people who have little or not much you have to find ways to increase your income so you can then use to allocate into the assets of your choice.
These resources will help you:
–6 Ways to Make Money: How Regular People are Becoming Millionaires
–Best & Upcoming Building Wealth Books
–Rules of Wealth Creation: The Basics
– How and Where to start budgeting and investing? Should you get a financial advisor?
Asset Allocation Strategies:
There are many strategies for asset allocation. There is a main or common six but I will discuss two of them and will talk about the others later in a updated article or in a different article.
The six that are common are:
- Strategic Asset Allocation
- Constant-Weighting Asset Allocation
- Tactical Asset Allocation
- Dynamic Asset Allocation
- Insured Asset Allocation
- Integrated Asset Allocation
For more on these tactics look into this site that talk more in depth about each one.
The two I will discuss are strategic and constant weight asset allocation. I recommend an asset allocation that’s moderate and medium risk. The strategic assets allocation is when the investor sticks to a mix of investments. The investments chosen are assets selected based on expected rates of returns for each asset class. This is what I use.
The constant-weighting asset allocation is when a investor buys and holds.
This tactic investors buy and hold regardless of changes of value.
Investors who use this tactic are confident their gains or returns will be good over the long term and stick to it. I also leverage this technique in my investment journey.
No point in me buying and selling often.
Warren Buffet, a billionaire, even said a person doesn’t have to be particularly smart but just patient if they buy quality assets and hold them for long periods of time.
I tend to go with and listen to the people who are the wealthiest or someone who has been getting results, after I do my own due diligence, for investment advice.
This tactic made Warren Buffet a billionaire. Also, he was buying not just stocks but income-producing assets like other businesses.
Data Insights
Data collected from the American Association of Individual Investors through a survey show individuals have an asset allocation of the following: (The numbers change when the data is Updated)
64.81% Stock
19.91 Bonds
16.29 Cash
Of course your allocation is dependent on your age and goals for investments. The take away is to discover asset allocation tactic you prefer and then implement and chances are asset allocation will change overtime.
When the economy declines many investors shift their asset allocation strategies from aggressive stocks to bond investments.
It is important to note that the asset allocation from the data above represents a basic level. It is alright to start off in paper assets but the best and wealthiest people work within and outside of paper assets.
For example, the wealthy have stocks and bonds and large cash holdings but they also have but not limited to businesses, royalties, passive and real estate income.
This diverse stream of income makes them able to withstand economic crisis and stock market crashes.
The person who just relies on stocks and bonds will feel the hit from a stock market crash or economic downturns.
The best asset is your mind so have a asset allocation strategy that works within and outside of paper assets and build a huge fortune that can withstand economic storms.
Next Steps
- Define your investment goals clearly & discover your risk tolerance
- Explore 4 to 6 or more asset allocation tactics
- Pick one to focus on
- Evaluate your financial situation and ensure the asset allocation tactic chosen is in alignment with your investment goals
Leave a comment below on any thoughts that you have.
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