The Importance of Proper Asset Allocation

According to Investopedia (Asset Allocation Definition, 2013), asset allocation was designed to balance risks and returns by allocating portfolio assets based on individual goals, risk tolerance, and investment period It is an investment strategy. There are three main asset classes: stocks, bonds, cash and cash equivalents; but they all have different degrees of risk and return. Cautious investors should carefully assign each asset class to his portfolio. Proper asset allocation is not designed for everyone, it is a controversial topic based on the needs and needs of individual investors.

Rebalance is just a mechanism to maintain proper asset allocation. This is a mechanism that makes it possible for investors to buy at a low price and sell at a high price systematically. To show a very simple example, assume that the asset allocation is 50% shares and 50% bonds. What is the 15% increase in the stock market? Now you have 57% shares and 43% bonds. If the target asset is set at 50/50, we will sell 7% of the stock and buy back 7% of the bond at 50/50. This allows you to check the stock (or the asset class valuation) or buy bonds at a discounted price (or asset class depreciation).

There are two reasons why asset allocation is important. First of all, the combination of asset classes you have is a major factor - others so far say this is the biggest factor in determining your overall portfolio performance. In other words, the basic decision on how to divide funds between stocks, bonds and cash may be more important than the company that decided to invest. (Previous article on asset allocation) Next, you can maximize while minimizing the impact of market volatility by simultaneously splitting the investment fund into asset classes that do not respond to the same market forces at the same time. Opportunities to improve long-term returns. Ideally, if investment in one category is insufficient, assets in another category may work better. The benefits of the latter will help offset the loss of the former and minimize the overall impact on the portfolio.

What is Asset Allocation? Asset allocation balances risks and returns by adjusting the proportion of each asset in the portfolio based on the risk tolerance of the investor. In a more comprehensive way, asset allocation is a balance between various industries to maintain a balanced portfolio. This is very important because if you invest only in one department or asset class and its department tanks, the value of the portfolio is completely lost. Furthermore, considering that you can invest in departments or asset classes, you can see that different asset classes lead the industry each year. Market cycle is demonstrated by subgraph