Asset allocation is dividing a portfolio among major asset categories such as bonds, stocks, real estate, and cash to reduce the risk of the portfolio. If one investment loses a lot of value, diversifying limits how much money will be lost and reduces the risk of giving up everything you put in. The downside of diversification is that if one investment gains a lot of value, not too much money will be made.
In the final analysis, your overall investment return will be closely associated with the asset categories and allocations that you select. An investor’s group of investments, frequently called an investment portfolio, may be divided in numerous ways among stocks, bonds, and cash management options. You might choose a 20/40/40 portfolio–20 percent stocks, 40 percent bonds, and 40 percent cash options, or you might choose a 75/20/5 ratio–75 percent stocks, 20 percent bonds, and 5 percent cash.
Several factors will impact the exact rate of return that you receive on your investment portfolio. Studies show that the most important factor, asset allocation, will account for about 90 percent of your return. The selection of individual securities and market timing will account for the remaining 10 percent or so.
The critical question is: What is the ideal asset allocation for you? Here are several factors to consider as you make this decision.
Your ideal asset allocation will be influenced by your:
- Investment Goals
- Risk Tolerance
- Time Horizon
- Tax Situation
- Time & Skill to Manage Portfolio