Why asset allocution in investing is so critical
When investing your money it is important to diversify your portfolio. In fact, the more diverse your portfolio, the more likely it becomes that you will continue to make money over the long haul. One of the most critical aspects of diversification is asset allocation. There are several reasons that asset allocation is so important.
The name of the game in asset allocation is to invest your money broadly enough that you will be able to take advantage of any high performing area of the market. Not everything goes up all the time and not everything goes down all at once. However, there is a general trend toward appreciating. This is the reason that people invest in the first place. By using good asset allocation, you will be able to take advantage of the general appreciation of the market while not relying on the appreciation of any particular market at any particular time.
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Asset allocation allows you to balance your downside protection against your upside potential. This means that if you have allocated your money right you will be able to take advantage of the seesaw effects that influence investment. By allocating your investments to both domestic and foreign markets, you will sometimes loss money when the domestic market takes a hit. However, when the dollar falls against the Euro the Euro rises against the dollar. By having investments in each market, you will be able to ride the seesaw and benefit from the upswings in either market.
Besides having investments in both foreign and domestic equities, you should allocate your assets among the other asset classes. The more broadly you define your asset classes, the higher you can expect your annual returns to be. The key to this is investing in non-correlated asset classes. You may think you are diversified because you are invested in large-cap, small-cap, domestic, foreign, and emerging market stocks. The problem with this strategy is that all the diversification is within one asset class-the stock market.
As the stock market goes, so goes the stock market. Meaning that stocks are correlated with one another on some level. Your interest in asset allocation is to investing in asset classes that aren't correlated with one another. As stocks go down, maybe real estate or foreign currency goes up. If one asset does not affect the performance of another asset, the assets are in uncorrelated asset classes. You should consider investing in a wide variety of asset classes.
Asset classes are defined differently by different investors. Some of the asset classes that you can invest in include
Money market accounts-- There are really investments in cash money and will do, basically, what the dollar does
Bonds-this includes junk bonds, governments or corporate bonds, and short or long-term bonds. These low risk investments are good investments to pair with stock investments.
Real estate--the real estate market might be one of the most uncorrelated with other asset classes
Collectables--things like art and fine wines are also typically uncorrelated with other investment opportunities
Precious metals-some financial advisors will strongly recommend some investment in metals such as gold and platinum, which maintain their value in spite of market fluctuation.
Consult with your financial advisor and suggest that you are interested in diversifying your portfolio into several uncorrelated asset classes. If you are investing your money without a financial advisor, you might consider reading some books about investment. AssetAllocation.org is a web sit that offers plenty of advice on asset allocation. From that site or a similar site, you will be able to find books and other references that will help you in asset allocation.
