Essential Things to Learn about Asset Allocation
Asset allocation is very important. So here are some very important things you should consider when it comes to that department.
Risk vs. Return
The risk-return trade off is at the core of what asset allocation is all about. It’s easy for everyone to say that they want the highest possible return, but simply choosing the assets with the highest potential isn’t the answer.
The biggest market crashes in history and the more recent declines of 2007 and 2009 are all examples of times when investing in only stocks with the highest potential return was not the most prudent plan of action.
You have to admit that every year your returns are going to be beaten by another investor, mutual funds, pension plan, and others. What separates greedy and return-hungry investors from successful ones is the capability to weigh the relationship between risk and return.
It’s true the investors with higher risk tolerance should allocate more money into stocks. However, if you can’t stay invested through the short term fluctuations of a bear market, you should cut your exposure to equities.
Determine Short and Long Term Goals
We all have goals. Whether you aspire to build a huge retirement fund, own a yacht, or vacation home, pay for your child’s education or simply save for a brand new car, you should consider it in your asset allocation plan. All these goals need to be considered when determining the right mix.
For instance, if you’re planning to own a retirement house in 20 years, you don’t need to worry about the short term fluctuations in the stock market. On the other hand, if your son will be entering college in five to six years, you may need to tilt your asset allocation to safer fixed income investments.
And as you approach retirement, you may want to shift to a higher proportion of fixed income investments to equity holdings.
Time if Your Friend
The US Department of Labor has said that for every ten years you delay saving for retirement (or maybe other long-term goals), you will have to save three times as much each month to catch up.
Having time not only enables you to take advantage of compounding and the time value of money, but it also means you can put more of your portfolio into higher risk-return investments, namely stocks. Two unlucky years in the stock market will likely show up as nothing more than an unimportant blip in 30 years.
Don’t depend on Financial Software or Planner Sheets
Financial planning software and survey sheets designed by financial advisors or investment firms can be beneficial, but do not depend solely on software or some pre-determined plan.
Keep in mind that standard worksheets sometimes don’t take into account other important information such as whether or not you are a parent, retiree, or spouse. There are also worksheets are based on a set of simple questions that don’t capture your financial goals.
Keep in mind that financial institutions love to peg you into a standard plan not because it’s best for you, but because it’s easy for them. Reach out to WibestBroker Cryptocurrencies and to learn more about it you can visit Wibest Broker Education.