It’s a bit like a box of chocolates
With the assumption that you like chocolates...Let’s say that you received a box of mixed chocolates for your birthday from a friend-of-a-friend. It’s the safest bet, as they wouldn't know if your favorite chocolate is dark pecan, or milk salted caramel. You’ll be happy with all the chocolates, but you will enjoy some more than the rest. Asset allocation plays around a similar idea. It’s about making sure that assets are diversified, so that there’s less of a risk of losing it all, and more of the chance that some assets will do well.
What is asset allocation?
To understand asset allocation, one needs to know about investment portfolios, which are a bundle of assets one invests in. This “bundle” it’s made up of a variety of investments in different asset categories. Asset allocation means dividing a portfolio in such a way that assets are diversified. For example this can mean investing in stocks, in a home, and in precious metals (yes - gold counts). Asset allocation is basically a smart investment strategy - the kind which will allow for an investor to have less risks and more overall gains.
It’s not one-size fits all.
Asset allocation is very personal. It depends on how much money one can invest, but also on the risk profile of an investor. To make things even more complicated, asset allocation will most likely change with your age, since at different points in your life, you will have different needs, risk-tolerance (or how much are you willing to lose?), and capital. Time horizon is an important component of asset allocation because the amount of time one is willing to have an investment for, will determine what kind of investments one makes. A diversified portfolio will be diversified both between asset categories (i.e : stocks and real estate) and within asset categories (i.e : owning multiple stocks). When investing in multiple stocks, it’s also important to invest in multiple industries rather than just multiple companies.
Can I assume that…
Asset allocation is one of the most effective investing strategies? Yes, you can. Just like you wouldn’t put all the copies of your house keys in the same spot, you should not put all your money in one investment. Asset allocation is a way to help balance various investments over a variety of asset classes. Spreading money over various investments is called diversification. When diversifying, one can more easily reach financial goals, both for the short and the long-term. One of our goals here at Bits of Stock is to help people learn more about the financial market, so that they can make sensible decisions over what investments are best for their portfolios.
Why will your future self thank you
Asset allocation is a great way to make sure that one is investing smartly for future returns. Not only diversifying a portfolio will save one from significant losses, but it will also make sure that there will be overall returns. One cannot predict a market’s performance, but it is safe to say that it is extremely unlikely that all market assets categories will move up and down at the same time. On the contrary, it is quite common for one to do well when another is performing badly.
- As a rule of thumb for stocks, one holds a diversified portfolio when owning 15 to 20 stocks.
2. Warren Buffet bought a $12,000 farm at 14 after saving from delivering newspapers.
3. According to Forbes, in 2019, only 244 out of 2,153 in the world’s billionaires were women.