| |
| |
|
Investing Information |
|
|
|
Asset Allocation: Critical to Your Investment Success
Asset allocation is a critical component of investing success. Both research and academic studies show asset allocation to be single most significant factor in determining your financial goals. Allocation influences both the total long-term return and risk of your investment portfolio. Other factors such as security selection and market timing account for a very small percentage of your investment returns. Unfortunately, the most important decision to achieving financial success is also the least understood. What is asset allocation? Most people confuse asset allocation with diversification. They believe it has something to do with making multiple investments among groups of similar assets. Ask investors to list the assets in which they would consider investing. Typical answers include "growth stocks", "bonds", "large caps", and sometimes "international stocks." But their diversification is limited to selection within one asset. For example, someone choosing to purchase technology stocks may invest in five or six companies - but all within the technology industry. This reduces risk if one of the companies should fail, but is useless when the technology industry (or entire stock market) slumps. Asset allocation goes beyond diversification to reduce risk across all type of financial assets (cash, stocks, bonds, commodities, real estate, and even venture capital or hedge funds). Investments and risk can be divided further into subcategories of stocks including large-cap, mid-cap, small-cap, value vs. growth, and international vs. domestic. Similarly, bonds can be divided into subcategories of short-term, and long-term, tax-free, high yield, convertible, emerging markets, floating rate, and international vs. domestic. Multiple combinations allow investors to allocate their portfolios into a number of asset classes and categories. Adding high risk asset classes and investments to a portfolio may seem risky. But combining assets that behave differently, or even opposite to each other, both increases the return and lowers the risk of an entire portfolio. For example, international stocks are considered "riskier" than domestic stocks. Yet, we often see the prices of U.S. stocks go up on the same day prices of international stocks go down -- and vice versa. We call this negative correlation. Profits from one asset balance the losses from another. Combining international and U.S. stocks actually lowers investment risk by reducing daily price swings of our entire portfolio. History demonstrates many markets exhibit similar negative price correlation. In a slumping economy, bonds vastly outperform stocks as interest rates drop. In an overheating economy, inflation helps generate stellar returns in the commodities market. But timing such events is unpredictable, and the variability of returns represents risk to any investor. Choosing to purchase only stocks, only bonds, or any single asset class increases the risk of losing money if that market underperforms. The power of asset allocation comes from reducing risk while increasing returns. Reducing risk by combining multiple asset classes, however, is not a simple process. While each asset has its own unique measure of risk, many assets share similar price behavior (their prices go up and down together in any market). Combining such complimentary investments increase the risk of wild changes in price. Trade-offs between asset risk and expected return must also be considered. High yield assets typically experience high volatility, or large changes in price. These assets must be balanced by investments with lower rates of return to protect against large declines in value. Successful asset allocation requires finding the proper mix of assets to balance reward with an acceptable level of risk. Proper allocation planning requires asset research and investment analysis. Fortunately, tools are available to assist the independent investor. Popular financial websites offers independent investors help with educational links and software to build portfolio allocations based on a survey of financial questions. For advanced investors, many books have been written to painstakingly explain the theory and practice of asset allocation - also called MPT (Modern Portfolio Theory). Casual investors can purchase mutual funds specifically designed to automate asset allocation based on an expected retirement date. Pragmatic investors can explore the many financial planners and advisory services that offer asset allocation portfolios specific to their needs. Consider your options carefully. Each solution offers its own set of advantages and disadvantages. Pick a style that closely reflects your own. Just how important is asset allocation? It's the single largest determinant of your long-term financial success. Tim Olson TheAssetAdvisor.comSubscribe to our free newsletter. Mr. Olson is the editor of The Asset Advisor, a financial investment service providing proven strategies for no-load mutual fund investors. He brings 26 years of education and experience from Stanford University, Ernst & Young, personal wealth management, and venture capital investing.
MORE RESOURCES:
Investing - Google News |
|
|
|
RELATED ARTICLES
Investing: The Art Of Making Your Money Work For You There is a lot to know about investing. It all depends onwhat type of investing you are interested in as well. Fundamentals of Option Pricing When one begins to consider an option, it is very important to figure out how the premium is calculated. Option premiums depend on a variety of factors including the time left to expiry as well as the price of the underlying security. Finding the Perfect Company The perfect company - it's the holy grail of the investment world. The company that will make its initial investment hundreds of times over. Investors: Avoid These 5 Common Tax Mistakes For many investors, and even some tax professionals, sorting through the complex IRS rules on investment taxes can be a nightmare. Pitfalls abound, and the penalties for even simple mistakes can be severe. Have Analysts Gotten Honest? It caught my attention when I heard an analyst on a popular financial news program tell investors to sell a stock because too many analysts liked the company, citing the fact that there were no sell ratings.It seemed perfectly logical to me that analysts wouldn't be telling investors to sell 3M (MMM), which has one of the most consistent positive earnings records in the history of the stock markets. Makin The Sauce Let's face it, you're on a roll. After getting down to your attorney's office to sign the new Living Trust and then diligently tracking down your assets to fund the trust, you should be congratulated. How to Calculate the Value of Your U.S. Savings Bonds If you're like many Americans over the age of 55, you've probably had money taken out of your paychecks for years and years in order to purchase U. S. Waiting 20 Years Can Cost You Millions - Dont Wait Start Today Many Young people live for Today. They really don't fully understand the power of compound interest. HYIPs Investments or Scams? High Yield Investment Programs (HYIPs) appear at first to be the secret to unlimited wealth and fortune, but as you can guess that quickly changes. However, I have found myself still using them in a very limited fashion as a generator for my digital currency exchange. Buying Florida Investment Properties and Where Its Hot Relaxing in Style: Florida Investment PropertiesIn Florida, relaxing in the sun and sand is a way of life. There's no better way to experience a slice of Florida living than buying your own space. An Old Dividend Stock Investment Idea, for a New Generation Death and taxes! The certainties of life! And then, of course, there are the mortgage payments, the utility bills, phone bills, the car payments and thirsty automobiles. Add that to the grocery and clothing bills, and there appears to be more then just death and taxes as certainties of life. What Is A Fair Market Value, Really? If Youre Going To Trade, Be Sure Its Worth It! I've been involved in online trading, specifically with stock and index options, for several years. In this time, I've spent a great deal of time thinking about value and the fact that anything, be it a stock or currency or even a house, is worth exactly whatever someone else will pay for it. Is Starting A Business For Me? What To Consider Before Starting A Business Do you have the right temperament?Starting a small business is one of the most serious decisions that a person can take in life. Positively, it often results in higher income levels than one could achieve as an employee together with the unique buzz of being your own boss but conversely it also can be stressful, will demand longer working hours and will probably reduce your ability to take long holidays. Foreign Investing - US Investors Still Missing Out? Investors are still too slowly realizing what the academics have long pointed out -- adding foreign stocks to your portfolio will, over the long term, increase your returns and lower the overall risk of your portfolio.US investors embracing foreign investing are both realists and optimists. An Introduction to Offshore Investing Once upon a time, offshore investment strategies were spoken of in hushed tones. They were conversations restricted to the plush offices of private Swiss bankers, or a dinner table topic in the expensive playgrounds of the multi-millionaires. Everybody Wants to Know How to Invest Those unfamiliar with the process of making and managing investments often have more than a few trepidations about investing in general. They figure that, since they do not know how to invest, they will never learn. CYA You all know what CYA stands for. Of course,Cover Your Assets. Chinas Inscrutable Currency Strategy Purpose: Expose Opportunities for Smart InvestorsThe move by China's central bank to drop the yuan's rigid peg to the dollar on the day of my return after a three-week trip to Asia left a host of questions unanswered. The basket of currencies that will allegedly determine the value of the yuan going forward was not disclosed. Realistic Investing Expectations Over the long term stocks have provided us with great average return results. But this average return masks a great deal of volatility, because returns have fluctuated within a very wide band. June 2005: Weather Forecasts for Weather Traders If Johannes Kepler, the renowned 17th century astronomer and discoverer of the planetary laws of motion, could speak from the heavenlies, he might have a few words of wisdom to share with the National Weather Service. Although Kepler's name is not normally associated with meteorology, he was quite the weather forecaster in his day.
|
|
Free Links Direct
|
||||||||||||||||||
| © 2007 | ||||||||||||||||||
