Placing all your money on your favorite horse is a gamble. If the horse wins, you win, but if it loses, you lose all the money you had riding on it.
When investing your money, you don’t have to put all your money on one “horse,” or one asset. Instead, you can put your money into a collection of assets. This is what we refer to as asset allocation.
When you plan asset allocation models well, you protect your investments. They maximize the growth potential, no matter which one wins in the markets.
1. How Do We Define Asset Allocation?
Asset allocation is an investment strategy. The aim of asset allocation is to balance risk and reward. Asset allocation is dividing a portfolio’s assets. The idea behind asset allocation is to meet the financial goals of an individual.
Asset allocation models help investors reach their tolerance for risk and time horizon.
2. What Does An Investment Strategy Usually Include?
Your investment strategy will include the diversification of your portfolio. Diversification amongst asset classes is vital.
The reason for diversification is that historically stocks, bonds, and cash do not lose and gain simultaneously. When factors cause one asset class to underperform, the returns of another improve. Investors usually invest in a range of asset classes. This is in anticipation that if one asset class loses money, the others will have an upturn.
3. What Is the Main Goal of Asset Allocation?
When we divide the money into our investment portfolios amongst stocks, bonds, and cash, we refer to this as asset allocation.
The idea behind asset allocation is to test the tolerance in the market. These include risk and the time horizon. Diversification is key to successful asset allocation!
Stocks offer the highest returns, although they are more aggressive than investments. Furthermore, they have the highest risks.
Bonds, however, offer lower returns on investment than stocks. These are “safer” and more conservative for the more conservative investor.
Cash is not your run-of-the-mill investment choice. These assets include savings accounts, CDs (otherwise referred to as certificates of deposit), and money market accounts. Cash assets also include cash management accounts, money market mutual funds, and treasury bills. Investors with cash assets can benefit from smaller profits but with lower risk.
4. Why Do Investors Often Overlook Cash and Cash Assets?
Cash assets make up an important part of an asset portfolio. Remember, these assets offer the lowest return on investment of all asset classes.
Even though they offer the lowest risk of all asset classes, many conservative investors find these investments stable. Conservative investors prefer to lean towards safer investing options.
5. Why Do We Use the Term Time-Horizon in Asset Allocation?
A time horizon in asset allocation refers to how long before you need to recover your money.
How long can you cope to lose money in the short-term, and hold out until you benefit long-term? We refer to this as the time horizon. We also see this as risk tolerance.
6. Why Do Experts Suggest Cash Assets for Short-Term Investments?
Experts recommend investing in cash assets for short-term investments. These asset allocations consist primarily of savings and money market accounts. They also include some quality bonds and CDs.
The returns are low, but the risks are even lower. You won’t lose any money should you need to gain access to your cash at very short notice.
7. What If I Want to Take On More Risk?
You might not need to access your funds when investing with long-time horizons. Long time horizon investments could stretch over years. Sometimes even decades! It could take many years before you access your money.
Long-term investments give you the flexibility to invest with greater risk. Some investors choose a higher allocation of their equity funds when investing long-term. They can also allocate stocks at greater risk. The result of long-term asset allocation models is that it gives investors more room for growth.
You will need less of your own money to reach your goals. This usually happens when your initial investments grow exponentially.
Aggressive investing could see investments dropping in the short term, while long-term investments could see investments grow.
8. Are There Other Assets Besides Stocks, Bonds, and Cash?
Stocks, bonds, and cash might seem the obvious 3 important asset categories to invest in. There are, however, more options for investors to invest in.
Other asset allocation models include real estate, precious metals, private equity, and other commodities. But these investments carry their own risk categories that should be researched in depth before an investor takes the leap.
Saddock Advisory is Here to Help!
The team Saddock Advisory is here to help investors with asset allocation models and diversification. Get the right mix of assets to meet your short and long-term financial goals.
Before you make investments, you need to understand the risks of the investment or investments you are about to take.
Schedule a meeting today and we can discuss the best options for you and your portfolio.