An Introduction to Diversifying Between Asset Classes, How to Decide If Investing in a Balanced Fund Is Right for You, How to Add Annuities to Your Retirement Asset Allocation, You Only Need These 7 Vanguard ETFs to Build a Complete Portfolio, How to Build a Classic 3-Fund Portfolio With ETFs. By using The Balance, you accept our. Asset allocation is the process of dividing the money in your investment portfolio among stocks, bonds and cash. Read more about Outsource asset allocation to a fund on Business Standard. For example, if the stocks in your portfolio are all securities in just a few large-cap companies, you're not diversified for a better growth. Someone not comfortable investing in stocks may put her money in a more conservative allocation despite a long time horizon. If you don’t get the mix right, you could miss out on some opportunities to earn returns. Asset allocation is the process of spreading your investments over various types of assets to guard against changes in the market. She further decides to split this between large companies, such as Coca-Cola and Reebok, and small companies that most people have never heard of, called small caps. She buys $4,000 in index funds that track large-cap companies and $2,000 in index funds that track small-cap companies. Cash and money market accounts are appropriate for objectives less than a year away. Achieving Asset Allocation Through Life-cycle Funds. It is the portfolio allocation across stocks, bonds, cash and other assets such as real estate. The intent of Asset Allocation within portfolio design is to identify the right ‘mix’ of investments that align with your financial goals. In general, stocks are recommended for holding periods of five years or longer. A portfolio is a collection of financial investments like stocks, bonds, commodities, cash, and cash equivalents, including mutual funds and ETFs. The process of determining which mix of assets to hold in your portfolio is a very personal one. Asset allocation takes account of your individual circumstances and financial goals, as well as your attitude to risk. Asset Allocation is the distribution of wealth in various asset classes like debt, equity, mutual funds, real estate, etc for achieving long term financial goals and objectives and it depends on the risk appetite and returns expectations of the individual. But since they are properly hedged, it ensures they will not go down on a single bad investment. Beginners’ Guide to Asset Allocation, Diversification, and Rebalancing. As a means to aid in the asset allocation journey, today mutual fund houses have launched dynamic asset allocation funds. General Considerations. Asset allocation involves dividing an investment portfolio among different asset categories, such as equities, bonds, property, commodities and cash. Your portfolio should be diversified, and how your assets are allocated partially determines how diversified you are. Someone who is saving for a new car in the next year, for example, might invest her car savings fund in a very conservative mix of cash, certificates of deposit (CDs) and short-term bonds. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Although asset allocation is a critical part of creating a diverse portfolio, it's not quite the same concept as diversification. First, she decides to put 60% of her money into equities. In general, the younger you are, the higher percentage of equities you should own. Risk tolerance plays a key factor as well. For most investors, both the returns over the holding period and the volatility along the way are important considerations – and asset allocation influences both of these factors. This simply means how much risk you’re willing to … Asset allocation is the process of balancing risk and return in a portfolio by investing across different asset classes. As individuals approach retirement age, portfolios should generally move to a more conservative asset allocation so as to help protect assets that have already been accumulated. Bonds fall somewhere in between. Those with a low risk tolerance will favor bonds. She puts $3,500, or 35%, in fixed-income investments. The Balance uses cookies to provide you with a great user experience. Accessed Aug. 17, 2020. Asset location is as important as asset allocation. An "asset" can be anything from your home to your right to collect royalties on a book that you wrote. It depends on three factors: Your goals, time horizon, and risk tolerance will determine the model you should use. In the asset allocation table, you could choose to use short-term Treasuries (as opposed to a money market account) as your cash-equivalent when building your portfolio. Asset allocation is the process of dividing your investment between different assets, such as cash, bonds, shares, and property. When making investment decisions, the investors’ portfolio distribution is influenced by factors like personal goals, level of risk tolerance, and investment horizon. As of January 31, 2018, the fund has an allocation of 71% stocks and 29% bonds. Investors may use different asset allocations for different objectives. It is a static allocation that trusts in the market over individual impulses. Let dynamic asset allocation funds do it for you Asset allocation is a key component of any investment strategy. 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