Asset allocation provides investors a powerful investment advantages as it allows investors to achieve financial goals. By creating a proper asset allocation plan on a timely basis, it can help investors to manage investment portfolios with discipline and consistency.
Choosing the Optimal Mix for Asset Allocation
Asset allocation is to allocating an investor’s investment across different asset classes, which is determined based on their investment objectives, time horizon and risk appetite. It plays an important role which affects their investment returns, thus investors should ensure that the asset allocation chosen best meet their needs.
In general, an investor aims either for capital appreciation or regular income over the medium to long term. For those whose objective is to achieve capital appreciation can allocate a bigger portion of their investment portfolios in equity funds. This is because equity funds will focus more on achieving capital appreciation are suitable for investors with aggressive risk-reward temperament as it offers higher returns over the long term albeit with greater risk. However, a long term horizon of more than 5 years will usually have enough time to ride out market fluctuations over the investment period. In contrast, investors who aim for regular income can allocate a bigger portion of their investment portfolio in bond funds. Bond funds are more suitable for investors with conservative risk profile. As bond funds provide more stable returns, thus it’s suitable for investors who require recurring income streams to meet their regular living expenses.
Ultimately, investors risk appetite influences in choosing the asset allocation proportions. For example, an investor with a conservative risk profile may choose an asset allocation with 40% equity funds and 60% bond funds. Likewise, investor with a moderate risk may go for 60% in equity funds and 40% in bond. And an investor with aggressive risk appetite may choose to invest in an asset allocation that has a higher weighing to equities such as 80% equity funds and the balance of 20% in bond funds.
Having a defined approach to asset allocation will enable investor to achieve their financial goals by establishing a framework which guides their investment decisions. Discipline and focus provided by the right asset allocation strategy can minimize the anxiety and pressure associated with making investment decisions. So, investors need to adopt disciplined approach to asset allocation as it enables them to stay the course when facing poor market conditions.