An important strategy that involves the allocation of assets to balance the risks and the rewards in your portfolio of investment is called asset allocation. Asset allocation, in the simplest terms, tells you how much wealth you should allocate to different classes of assets. It helps you to distribute your funds in such a way that the risks and rewards with regard to your wealth growth are equal, and risks are not overpowering rewards.
If you ask most investors what their classes of assets are, they will tell you that their asset classes constitute stocks, cash and bonds. For each of these classes of assets there are varied expected risks and returns. If these are blended in such a way that investors are provided with potential safety against losses and the possibility of fund growth, then the asset allocation proves to be beneficial for investors. The wealth allocation in different asset classes is what is known as diversification of an investment portfolio. Experts in the world of finance and banking will always recommend a mix of assets to diversify your portfolio. In case an asset in one class proves to be risky, resulting in losses, the others may give you rewards. Thus, your risk is mitigated.
By their very nature, markets are volatile. They are dynamic places, depending on the mood of investors, speculation and the changing pace of the economy. A stock that is high today may come crashing down tomorrow. Therefore, an appropriate strategy enabling different assets to be allocated/distributed is a must to place your financial portfolio of investment in an advantageous position. Here are the benefits of asset allocation:
Diversification of Your Portfolio - The allocation of assets lets you invest your funds in different asset classes. This mitigates your risk as some asset classes may be potentially risky, while others are fairly dependable. Different classes of assets are affected in a different way by forces of the markets, the condition of the economy, etc, so risks might not have an adverse effect.
Investment for the Long Run - Asset allocation lets you consider the long-term prospects of investment. Again, this reduces your liability of risk. Fluctuations in the markets don’t impact investments that are held for the long haul.
Maintains Investment Discipline - Since portfolio diversification compels investors to invest with the long term in mind, a degree of discipline seeps into your investing activity. You can place adequate focus on assets that are important to your goals and be a better investor.
Gainful Returns - Wealth allocation from the perspective of long-term investment in a range of assets results in great returns on investment. By the very law of proportion, your portfolio will likely outperform itself in a long span of time. With adequate cushioning of a variety of assets that lower the risks of market fluctuations due to a single asset, there’s a strong chance in the positive direction for gainful profit.
Motilal Oswal has your back where investments are concerned, and helps you to allocate your funds to yield maximum profit. With asset allocation, you can re-invest with profits and grow your wealth in a systematic way.
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