Asset allocation is an important technique used by successful investors to balance the risk vs. reward ratio by diversifying their portfolio based on the investment goals, risk tolerance and time frame of investment. Once the investor decides his investment goals and risk appetite, he starts to narrow down his investment budget and starts dividing his funds among various asset classes based on their risk/reward profile. The broad range of asset classes which share similar risks versus returns ratio includes:
Bonds and Securities: They provide fixed income on regular basis and can be short-term or long-term, Corporate or Government Bonds. They can be based on domestic or foreign markets.
Stocks: Stocks are the most traditional assets which can be categorized based on sectors, small-cap, mid-cap and large-cap, dividend yield, growth, value etc.
Commodities: This includes precious metals like Gold and Silver, energy and fuels, agricultural produce, other metals like copper, iron etc. They do not yield regular income to the investors.
Derivatives such as futures contracts, stock options, binary options, collateralized debt etc. These are financial instruments derived from other form of assets such as stocks and commodities.
Collectibles like ancient stamps, historical documents, ancient coins and artwork.
Apart from the above asset classes, some investors also prefer to invest in private equity, foreign currencies, mutual funds, real-estate, insurance products etc. The reason investors prefer to spread their funds across different asset classes is to ensure minimum losses and higher returns on investment. Before investing in any asset, investors have to analyze the pricing versus performance of the particular asset and then decide the percentage of funds they should allot for same. Investors also follow different asset allocation strategies such as core-satellite asset allocation, tactical asset allocation and strategic asset allocation.
Tactical Asset Allocation – This is an aggressive investment strategy in which the investor tries to position his/her investment portfolio among assets which yield the highest returns.
Strategic Asset Allocation – This long-term investment technique aims to maintain a diverse portfolio which can guarantee optimal balance between ROI and expected risk.
Core-Satellite Asset Allocation – It is a hybrid investment technique which makes use of both tactical and strategic asset allocation methods.
Investing in broad selection of assets is very important in order to remain profitable during tough economic conditions. You should diversify your portfolio by investing in disparate asset classes so that even if one of the assets is not performing well, other assets will help you maintain the balance. You should also plan to diversify within a single asset class by analyzing the market conditions. For example, when you are investing in stocks, you should not concentrate on one particular sector or stocks of any individual company. You should invest in stocks of different companies belonging to various sectors and diversify your funds across large-cap, mid-cap as well as small-cap companies. You should not just invest in U.S stocks but also concentrate on foreign stocks of emerging countries with potential growth opportunity. You should follow the live news feeds and keep watching the market trends through various technical indicators such as charts and graphs. Always have the economic calendar handy with you and don’t miss the important market updates and financial announcements. You can also purchase Equity funds which have long-term growth potential by investing in shares of wide selection of companies. Some equity funds also guarantee regular income which is preferred by some investors.
Collectibles such as ancient coins and historical documents are also good assets for long-term investment which can guarantee substantial returns. Government and Corporate bonds are preferred by Investors who expect Capital growth as well as regular income. Bonds usually promise to pay the bearer certain amount of interest during its lifetime and the principal will be repaid at the time of maturity of the bond. You can also invest in commodities like Gold and silver which do not offer regular income but can be used to hedge against volatile market conditions. Many investors use Gold as a hedge against weakening dollar or stock market. Some investors also make money by trading binary options which involves predicting the future market price of underlying assets such as stocks, commodities and forex currency pairs.