In the simplest of terms, Asset Allocation is typically an investment strategy that assists investors to maintain a balance between risk and reward by tuning their investment portfolio as per their financial goal, investment tenure and risk appetite.
The Reason Why Asset Allocation is the key to financial planning
The investment market is unpredictable and therefore one can’t predict which group of assets will outperform the others and which one will underperform. This uncertainty makes it risky for investors to invest in only one group of assets. Asset allocation diversifies one’s investment profile and helps investor even out the market risk.
The following highlights,why Asset Allocationis the key to financial planning:
- Fulfilment of financial goals:Proper asset allocation helps to balance the risks and help earn steady returns, which facilitates the accumulation of funds over time and helps investor fulfil their respective financial goals.
- Increased Return and Reduced Risks:Investing your money in just one type of asset can result in a severe loss in a volatile market. Instead of putting all your trust and money in one category of assets, invest your money in different classes of assets with different risk levels to limit losses and ensure a steady flow of income even in a volatile market.
Things to consider before asset allocation
Now that you know how crucial asset allocation is for meeting financial goals with steady earnings and minimal loss, let’s go through the things that investors should consider before allocating their assets:
- Goals: Investors should prioritise financial planning from an early age to set financial goals for different stages of life and work systematically towards achieving them.Your asset allocation is largely dependent on your financial goals because different goals require a different tenure, corpus and asset combination. Divide your goals into long-term, short-term and mid-term goals and invest in assets that are suitable each time frame.
- Risk appetite: Each individual has a different level of risk tolerance which should be taken into consideration during the allocation of assets. A group of assets that earns great returns on investments also tend to have a high level of risk associated with it. Don’t disregard your risk appetite in the hope to earn higher returns, it the flow of market changes it may cost you more than what you bargained for.
- Age: A person’s risk appetite and financial goals undergo change at different stages of age and therefore age is a decisive factor in the process of asset allocation. A retired senior citizen’s risk appetite will be different from that of a young investor and so will be their respective goals. Investors should achieve a proper allocation of debt and equityassets as per their age and rebalance it on a timely basis.
A financial plan needs to be reviewed on regular basis to remain relevant in the changing market; similarly, the asset allocation of an investment portfolio needs to be rebalanced regularly to tackle the volatility. Consult our professional financial advisors to find out the perfect blend of asset allocation as per your goals.Follow Us: