The Brilliant Way to Select Your Asset Allocation
Investment Portfolio plays a huge role for all investors especially individual investors. This is because our investment portfolio are depending on asset allocation which is the one that we will be looking at, through out our investing years. We can choose how many time we want to re-balance the portfolio to maintain the asses allocation and consider how much risk that we are willing to take. One thing i know after reading a lot of investment and financial books, we cannot avoid risk when investing. Risk is money. They will always be a risk. But, the higher the risk, the higher your rate of returns will be. Although, you have to be extra careful with it , because as you increase the higher the returns, you also increase your lost.
Hence, to create your own portfolio you need to understand and set your own kind of asset allocation. Meaning that your asset allocations will always be different from your friends. Because it’s depending on your expenses, priority and investment budget. On the other hand, the step to invest will remain the same which is by using index funds or ETFs. So don’t worry, this article is only about to design your portfolios.
What is Asset Allocations?
Asset allocation is the implementation of an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investor’s risk tolerance, goals and investment time frame. The investment portfolio is be divided into three part which are stocks, bond and cash.
As I was saying, to create a suitable portfolio for you, recognizing the risk that you can consider or tolerable is vital for successful investing. By depending on your risk tolerance, goals and investment time frame, you will create your own specific investment portfolios.
Stocks would be the most profitable in your portfolio because it is the riskiest while bonds are much safer with less rate of returns. As for cash, it is for short term only and it is an highly liquid investment. Just barely above inflation because it is almost risk free.
And the next question is,
What kind of factor that affects your asset allocations?
1. Your Age.
This is just a common sense reason to set up your asset allocation or portfolios. The higher your age is, the less risky asset allocation you would want to take. For example, if you are already past forties or starting late at investing you would want take a less risky portfolios. It is much more preferable for you.
2. Your Health.
This is also the same reasoning as your age. For instance, if you are having a health problems, you would want to take less risky asset allocations.
3. Income From Investment Portfolios.
Do you need income from your portfolios? If yes, then you would want to take a more risky portfolios to generate a higher returns. Because you would want to generate an income and saving your investment for future use. Hence, you would need a higher returns which means higher risk.
4. Life Events.
These can be a lot of things such as divorcing, house burned down or you lose your jobs. Then, you would need to generate cash from your investment portfolios. Since this is an emergency, it’s okay. But, make sure you don’t cash it all of it or you will be retired poor or even broke.
What kind of formulas do you have for asset allocations?
Easy, the common rules of thumbs would be 100 minus your age. You age would be your bonds and your answer to that subtraction would be your stocks. For example, if your age is 30 (100-30=70). This means that your stock and bonds asset allocation would be 70% stocks and 30% bonds.
However, this is just a very general rule for asset allocations because it only counts one reasons from the four reasons of choosing your asset allocations as i stated above. Which is your age only. It does not count your health, incomes and life events. But, you can begin setting up from there and add or subtract your level of risk that you can tolerate to your portfolio investment.
If you want the exact number for your asset allocations, check out The Smartest Investment Book You’ll Ever Read written by Daniel R. Solin. The author already provided everything you need for investment portfolio from zero to hero. He even divided the specific percentage of your asset allocations for stocks and bonds. Also, the author divide it into for category which are, low risk, medium low-risk, medium high-risk and high risk. But, this is just a recommendation, if you to change slightly or change a lot, it’s up to you.
In a nutshell, managing your portfolio depending on your risk are important to a Smart Investor for a long term success . Don’t let your retirement years be tainted by the discomfort of poverty. Reliance on family members or government programs for your financial well being will be your sources of unhappiness, insecurities and low self esteem. The sooner your start savings and planning your retirement, the better. A prudent and intelligently managed portfolio of index funds has the highest probability of providing security in the years when it will be needed the most.
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