Asset Allocation is basically an investment strategy that helps investors but new and experienced to achieve a balance between the risk and reward factor in their investment portfolio. An investor can utilise the strategy of asset allocation by structuring their investment portfolio on the basis of their risk capacity, investment horizon and financial aim.
The Reason why Asset allocation should not be ignored by the investors
The volatile nature of the investment market makes it quite impossible for investors to predict the performance of assets. No matter how experienced an investor is, they can never really predict which class of assets would ultimately emerge as a winner and which class of assets will under-perform. It is only through the proper execution of asset allocation that investors can reduce the impact of the market volatility on their investments.
The following explains why asset allocation should not be ignored by the investors:
- To achieve financial aims: A person’s understanding of their financial aim and their systematic planning towards asset allocation is the main requisite to fulfil their financial aim. An investor may harbour a long-term, a mid-term or a short-term financial aim since such aim different in terms of their investment horizon they also require different asset allocation strategy to accumulate adequate funds to fulfil them. Only through proper asset allocation, investors can prop their portfolio to tackle market risks and earn steady returns which will ultimately help them achieve their aim in the long run.
- To reduce risk and increase earnings: Everybody has a different level of risk tolerance when it comes to market investments and therefore they should only invest in groups of assets that match with their risk capacity. While some assets bring more returns others are deemed to be less risky; investing only in those asset group that are deemed safe will not very helpful in terms of earnings even in the long run. To ensure a healthy flow of earnings at minimum risk, investors should allocate their assets well in different groups of assets.
- To assess and rebalance investment portfolio: An investor’s age is also a very crucial and decisive factor when it comes to planning their investments and investment-related moves. A person nearing their retirement will have a different set of investment goals than a person who has just begun their career. Similarly, a middle-aged person’s financial burden would be different than that of a retired person or a young person. Keeping one’s age and financial responsibilities in mind, a person should indulge in a particular group of assets and should always asses their performance. Since financial goals and needs change according to age, investors should indulge in timely assessment and asset reallocation to meet their changing financial needs.
The primary task of asset allocation is to ensure that investors’ financial planning doesn’t fall short in front of the changing market scenario and therefore it shouldn’t be ignored by them.
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