Asset Allocation

Asset Allocation

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Asset Allocation

Potential investors often face a challenge of deciding on the type of venture in which to commit their money. This fundamental decision is what brings about the notion of asset allocation. Asset allocation involves the practice of investors dividing their investment among a number of asset classes. The practice guarantees that the overall risk of an investor’s portfolio is significantly smaller than the risk of each individual class of assets in the portfolio. In turn, this assures an investor of a positive return from the portfolio even when some stocks in his or her investment portfolio are performing badly (The New York Times, 2009).

Asset allocation is a prudent way of minimizing one’s investment risks and maximizing returns. As an adage goes, “Do not put all your eggs in one basket”, an investor should not commit all of his or her investment in one class of assets. An investor should diversify the investment portfolio to include a mix of assets such as money market accounts, bond funds, annuities and real estate. The decision as to which classes of assets to invest in depend on an individual investor’s objectives, their risk tolerance level, as well as their investment time horizon (Darst, 2003). Investment objectives could be short-term or long-term in nature. A short-term goal may include investing idle cash in liquid assets for a short period to reap from fluctuations in exchange rates. On the other hand, a long-term goal may be the commitment of funds in solid assets with the aim of benefiting from capital gain.

There is a wide range of assets available for investors to choose from, and investors differ in terms of their taste for risks in choosing those assets. Some are highly conservative to taking on risks while others have a high affinity for risk. Risk unenthusiastic investors opt for less risky ventures due to fear of uncertainties while aggressive...