Asset Allocation: How to do it Right

If you want to maximize your chances of earning great returns with the minimum amount of risks, you have to have great asset allocation plans. Diversification and optimal asset allocation are keys to achieve a high-returning portfolio.

What is Asset Allocation?

HQBroker Reviews, Asset allocation is what you do when you divide your investment portfolio across wide-ranging asset classes. And these asset classes include stocks, bonds, and money market securities. You can think of asset allocation as a very organized and efficient method of diversification.

The choices you have include the following:

  • Small-cap stocks – these are issued by companies with small market capitalizations, ranging less than $2 billion. These are typically the ones sporting high risks because of their lower liquidity.
  • Mid-cap stocks – these are issued by middle sized companies sporting a market capitalization between $2 billion and $10 billion.
  • Large-cap stocks – these are shares issued by large companies with a market capitalization which are greater than $10 billion.
  • Emerging markets – these are securities from financial markets of a developing country. Investments in the emerging markets typically have the potential for higher returns. However, these also have enormous risks. That’s usually because political instabilities, low liquidity, or country risks.
  • International securities – these are assets issued by foreign companies. These are also listed on foreign exchanges. International securities enable you to diversify outside your country. Of course, doing so will expose you to foreign risks, which is a risk that means a country may not be able to meet its financial obligations.
  • Fixed-income securities – these comprise of debt securities which will pay you a set amount of interest. The payments can be made periodically or upon maturity. These usually have lower volatility due to the stable income you get from them. You must keep in mind that even if these are generally stable, there is still the risk of a default. Two examples of fixed-income securities are corporate and government bonds.
  • Real estate investment trusts (REITs) – these trade similarly to equities. The only difference is that the underlying asset is a share of pool of properties instead of the ownership of a company.
  • Money market – these are debt securities which are highly liquid investments. Their maturities are typically less than a year. The majority of these types of securities are made up of Treasury bills.

Conclusion: Which Asset to choose?

Online Trading Tutorial, Each asset class offers different kinds of rewards and risks. Therefore, it is important that you consider your risk tolerance, investment goals, capital, and time frame. Use these things as your basis for your asset composition and diversification tactic.

Usually, investors with longer time frames and more capital are more aggressive and may have higher risk tolerance. Therefore, they would aim for higher rewards and long term goals. On the reverse side, investors with shorter time horizon and smaller amount of capital will settle for steady, low risk and return allocations.

There are many different model portfolios that investment companies let their clients see. Each of these models is made up of varying asset classes, depending on what suits the client the most.