4 Benefits of Asset Allocation

Asset allocation is an investment strategy in which investors set aside a certain percentage of their investment dollars for multiple types of asset classes. Part of their money might go to stocks, while another percentage goes towards bonds. This type of investing provides a few definite benefits for investors.

1. Diversification

One of the primary objectives of investors is to diversify their portfolios. Asset allocation allows investors to diversify according to a specific set of rules that are in place. With this strategy, you will not be putting all of your eggs into one basket. If one type of asset is performing poorly, you have several other assets to bring up the performance of the portfolio. In many cases, stocks will perform poorly, while physical assets like gold and silver skyrocket in value. If you are interested in long-term performance, you need to diversify your portfolio according to a specific asset allocation.

2. Meet Risk Tolerance

Every investor has a unique level of risk tolerance. When it comes to investing, some people like risk and some people like to draw small returns in exchange for virtually no risk. With asset allocation, every type of investor can be accommodated. You can maximize returns while meeting your level of risk tolerance at the same time. By diversifying your portfolio through asset allocation, you can lower the amount of potential risk while increasing your returns at the same time.

3. Prepare for Retirement

Many people use asset allocation in order to prepare for retirement. When you are younger and you still have plenty of time to work, investing in a majority of stocks makes sense. Taking on additional risk is fine because you can make up for mistakes. However, when you are close to retirement, you want to have a more conservative portfolio. You do not necessarily want to invest the majority of your money into stocks. If the stock market is down, you may not be able to retire on time. As you get older, you might want to allocate more of your portfolio to bonds and other low-risk investments. This way, you can still bring in some decent returns without taking on all of the risk that comes with investing in stocks.

4. Find Profitable Investments

Another benefit of asset allocation is that you can find profitable investments. Many people get locked into a particular type of investment and shut out all other options that come to them. For example, many people get so caught up in the stock market that they fail to look at the opportunities that come with Forex or the commodities market. When you diversity a certain amount of your portfolio to many different types of investments, you can see what really works and what does not. You can allocate more money to the investments that perform well and allocate less to the other investments. 

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