Asset allocation

Asset allocation is the basis of most financial plan. It tells you what some of your money want to invest in different types of investments or assets such as stocks, bonds, etc. It also can describe of how much time you have to achieve your goals and whether or not to wait to see the value of your investment's change much between now and then.

Asset allocation is derived from two important concepts of investment:
1. The risk diversification. Which means spreading your investments around different types of investments to avoid losing everything if one is performs very poorly. Think "Do not put all your eggs in one basket" if the basket falls, you lose all the eggs.

2. Higher returns mean higher risk. For high return investments, you must increase your risk or possibility of losing your money. Think "no such thing as a free lunch," or "if it looks too good to be true, it probably is". The shares have given shareholders a higher average profit than bonds over the past 80 years, but have been more volatile in the short-term with the values change more dramatically for better or worse.

The asset allocation scenarios are usually prepared by professional financial advisers who start asking questions about:
• How much money to invest
• What do you want to use this money (payment on a house, college fund for your child, retirement, etc.)
• How long you have before you need it (which is usually based on your age) and
• If an investor is considered conservative, moderate or aggressive.

The final area of questions is trying to identify "risk-tolerance". Investors with low risk tolerance do not want to diminish the value of their investments even if only temporarily. Usually have low profits. High tolerance to risk means that the temporary market declines will not bother you much, either because you have extra money or because you have enough time before needing the money and can afford to leave invested until the market rises again.

As a general rule, younger investors are more aggressive or most of their assets in equities. When you have several years before needing your money, you may face to take more risk in hopes of having a larger average gain over time. The older or more conservative investors are less worried about growth, and more concerned about keeping what they have, so your asset allocation will probably be in favor of bonds. Whatever your age or risk tolerance, you should put some of your money in different places because of diversification; the asset allocation only tells you how to put in each.

You can implement your asset allocation in different ways, using mutual funds, bank deposit account, or investment portfolios that build on your own.

Asset allocation needs to be reviewed from time to time. For one thing, the development of your investments can lead to change. For example, if the shares of your portfolios are doing well and increase the value, it may represent a greater percentage that when you first bought them. While the value of your bonds can be lower because the interest rates have risen, then your percentage is lower. When this occurs, you may consider "re-balancing" or sell the stock and invest the profits in bonds. Re balancing also has the benefit of imposing a good discipline in investment, because it does sell the investments after the value has grown, and buy when market values are low.

Asset allocation for your personal financial planning also needs periodic updating as your goal changes. In general, as you get older and closer to your goals, your asset allocation is more conservative. Probably still want some growth in it, so your total profit is better than or at least equal to the rate of inflation, which reduces the purchasing power of money.

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