An Introduction to Asset Allocation

Asset allocation is a term used in investment management. Professional investors use asset allocation to better allocate their portfolios. It is essentially diversifying the investment in a pseudo scientific way.

The investment world has different asset classes and investment styles that professionals realize are different performance wise depending on cyclical and global factors. Professionals also understand to diversify different investment managers for the investments.

Asset allocation can be broken down to tactical allocation as well as strategic allocation. The tactical allocation allows the portfolio to take advantage of short term opportunities in the market in order to outpace the benchmark index; such as the S&P 500 index. Strategic allocation is more long term, for instance a mutual fund company might make up a policy to always make a certain portion of the portfolio go short during a negative GDP quarter in the economy. This strategy in the long run, based on their research should produce a verifiable difference in performance, hopefully better performance.

One thing you should remember about asset allocation is that when dealing with stocks there is a optimal allocation percentage for each industry and or asset class according to the math and economics of investments.

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