Investing in the US? 5 things you need to know about asset allocation strategies

There’s a saying which sums up how one should think about asset allocation, “Don’t put all your eggs in one basket”. The logic is simple: If you drop the basket, you stand a risk of losing all your eggs. The same principle is very important when it comes to investments in general. It also applies to investing in the US. Very simply, it means dividing your investments across various assets such as stocks, bonds, and other assets. In this blog we tell you five things you need to know about asset allocation strategies.

1. There are two types of asset allocation strategies

The two types of asset allocation strategies are strategic asset allocation and tactical asset allocation. In strategic asset allocation, an investor sets an asset allocation and balances it on a periodic basis. In the case of tactical asset allocation, the investor shifts the assets held in different asset classes due to market trends or economic conditions. Strategic asset allocation works for beginner investors and investors who are risk-averse. It also works well for investors who want to invest for the long term and do not want to time the market. Tactical asset allocation, on the other hand, requires a fair bit of expertise.

2. An asset allocation usually takes your age and goals into consideration

  1. When you have time on your side, you can ride over market fluctuations. As such, you may have a considerable portion of your portfolio in equities. However, if you need the money you have invested soon, market volatility may affect your investments and cause stress. In principle, as you grow older, you might prefer to move your investments from equity to debt.

By that same logic, your asset allocation will depend on how far away you are from your goals. If your goal is more than 10 years away, a major portion of your investments may be in equities, However, when the goal is only a few years away, you may shift it to debt.

3. Your risk appetite plays a part in deciding your asset allocation

Age isn’t the only factor – your asset allocation is also decided by your risk appetite. You could be a retired person, but if your risk appetite permits, you may want to invest a portion of your assets in stocks. On the other hand, if you are risk-averse and cannot stomach market fluctuations, even at a younger age, you may want to invest a higher portion of your assets in fixed income instruments.

4. Even within an asset, it is important to diversify your holdings

Even if you are following a strategic asset allocation strategy, your portfolio would require rebalancing at regular intervals. Let’s say a person’s desired asset allocation is 70% in stocks and 30% bonds. If the markets have been performing well for a period of time, the stock weighting of the portfolio may have increased to 80%. In such a situation, the investor may sell off some equity holdings to bring back the portfolio to the desired asset allocation level, if they prefer to stick with their original asset allocation target (read here to learn about the essentials of a well-balanced portfolio).

It is important to remember that investing requires a fair bit of discipline. A proper asset allocation strategy is likely to help you meet your investment goals.

5. Asset allocation strategies require periodic rebalancing

Even if you are following a strategic asset allocation strategy, your portfolio would require rebalancing at regular intervals. Let’s say a person’s desired asset allocation is 70% in stocks and 30% bonds. If the markets have been performing well for a period of time, the stock weighting of the portfolio may have increased to 80%. In such a situation, the investor may sell off some equity holdings to bring back the portfolio to the desired asset allocation level, if they prefer to stick with their original asset allocation target (read here to learn about the essentials of a well-balanced portfolio).

It is important to remember that investing requires a fair bit of discipline. A proper asset allocation strategy is likely to help you meet your investment goals.

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Our team members at Vested may own investments in some of the aforementioned companies/assets. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for an investor’s portfolio. Note that past performance is not indicative of future returns. Investing in the stock market carries risk; the value of your investment can go up, or down, returning less than your original investment. Tax laws are subject to change and may vary depending on your circumstances.

This article is meant to be informative and not to be taken as an investment advice, and may contain certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, without limitation, estimates with respect to financial condition, market developments, and the success or lack of success of particular investments (and may include such words as “crash” or “collapse”). All are subject to various factors, including, without limitation, general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors that could cause actual results to differ materially from projected results.

This video is meant to be informative and not to be taken as an investment advice and may contain certain “forward-looking statements” which may be identified by the use of such words as “believe”, “expect”, “anticipate”, “should”, “planned”, “estimated”, “potential” and other similar terms. Examples of forward-looking statements include, without limitation, estimates with respect to financial condition, market developments, and the success of or lack of success of particular investments (and may include such words as “crash” or “collapse”.) All are subject to various factors, including, without limitation, general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors that could cause actual results to differ materially from projected results.

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