How To Allocate Assets in a Portfolio

If you have invested in a portfolio, it is very important for you to keep checking the allocation of your assets (stocks, bonds or other cash equivalents). Asset allocation helps you to diversify your investment in order to minimise your risk. It is to be noted that although you can control and minimise the systematic risks relating to your investing, but you can’t control the unsystematic risk (political and economical instability).

There are many different strategies which have been proposed to allocate assets in a portfolio. You can follow the strategy which suits your time horizon and risk behaviour. The studies have shown that the old people are more risk averse and tend to invest in the safe investment options (for instance, bonds), while the young people are more inclined towards taking risks by investing in versatile security markets (including stocks and swaps). Once you have developed your asset allocation strategy, you have to keep on evaluating your options according to the changing trends of the financial markets. The given steps will help you in developing your asset allocation strategy.

Instructions

  • 1

    First of all, calculate how much money you have to make an investment at present and how much will you be able to invest in the future.

  • 2

    You have to develop your time horizon whether you are planning to invest money on short-term, medium-term or long-term basis.

  • 3

    Decide your level of risk tolerance. Are you a risk taker or risk averse? It is very important for you to know and understand your risk tolerance as your whole investment plan will be based on this.

  • 4

    Now, you have to select a diversified portfolio which is most suitable for you according to your risk tolerance and time horizon. For instance, if you are risk taker and aggressive, you should select more stocks in your portfolio and if you are less aggressive, you will be more inclined towards the bonds on which the return is fixed.

  • 5

    You have to examine your portfolio from time to time in order to handle your assets well. If there is a need to re-balance your assets, you must do it.

Leave a Reply

Your email address will not be published. Required fields are marked *


4 + = eight