Essay about Importance Of Asset Allocation And Managing Risk

Essay about Importance Of Asset Allocation And Managing Risk

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Importance of Asset Allocation in Diversification and Managing Risk
By Yulian Isakov | Submitted On January 10, 2011

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Asset allocation means spreading your investments funds across many asset categories. As an investment strategy, this will help investor balance the overall portfolio risk, volatility, and performance. Asset allocation is an important construct to use when designing a portfolio. The goal is not picking or choosing specific securities, instead it is a focus on the overall architecture or broad investment categories that will ultimately mix together to help you meet your financial goals by factoring in your risk tolerance and time horizon.

Asset Allocation basics
The main idea behind asset allocation is that since not all investments follow a similar cycle, you are able to balance out the different risk and return cycles in your portfolio by spreading your investment dollars among different asset classes such as stocks, bonds, real estate, commodities, and other assets. It certainly doesn 't guarantee a profit or protect you against losses, but it can help you manage the amount of risk you face.

Different types of asset classes bring different levels of risk and potential for return to a portfolio, and they generally react to different market forces in their own ways and possibly at different times. The effects of a real estate market may hit the real estate sector first but perhaps affec...


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...ctives and market expectations. Also, it may be necessary to rebalance your portfolio from time to time to make sure you maintain your original asset allocation. For example, if the stock market is doing well, you will see that you portfolio will eventually become more overweighed on the stocks side than you initially intended. To rebalance, you may have to shift investment dollars from one asset class to another.

At times you may want to adjust your entire allocation strategy. For example, if you are not comfortable with the level of risk your initial asset allocation strategy exposed you to or your financial goals changed, you may need to compose a new asset mix.

Speak with your Financial Advisor on guiding you toward constructing an asset allocation strategy that is right for your investment objectives, your risk tolerance level, and your investment time horizon.

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