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• W130138546 abstract "THE ASSET ALLOCATION DECISION Every day your clients are faced with choices, the most important of which may be how they invest their money. The process can seem overwhelming, but if they start by dividing their money among investment categories (also called classes) then the rest will fall into place. WHAT IS ASSET ALLOCATION? Asset allocation means building a diversified portfolio utilizing different asset classes. Since investors all have their own objectives and tolerance for risk, individual asset allocations, or the way investments are divided among cash, bonds and stocks, can be very different. POTENTIAL BENEFITS OF ASSET ALLOCATION Asset allocation is an investment principle that is intended to optimize investment performance for a given risk tolerance. Instead of all of your eggs in one basket or putting all of your money in one asset class, your clients should diversify across asset classes. This way, your client's investment will not be subjected to the volatility of any one asset class. Different types of investments perform differently under various economic and political scenarios. And, changes in the financial environment will not have the same impact on all asset classes. Since no one can consistently predict how any type of investment will perform, a diversified portfolio will reduce the impact of underperformance from any one market. TWO MAIN TYPES OF ASSET ALLOCATION There are two asset allocation strategies that can be used to structure a diversified portfolio--each with a different intellectual basis. * Strategic Asset Allocation: This is what most investors think of when they hear the term and will be the focus of this article. It involves establishing weightings for different asset classes--cash, bonds and stocks--and rebalancing these holdings periodically as the investor's overall personal and financial situation changes over time. * Tactical Asset Allocation: Also referred to as market timing. This method attempts to overweight or underweight different asset classes at certain times to improve returns. As part of asset allocation, investors can diversify within an asset class, which often is done according to investment style. WHAT FACTORS SHOULD BE CONSIDERED BEFORE MAKING ASSET ALLOCATION DECISIONS? * Objective: What are your clients' investment objectives? You must first understand your clients' personal financial goals. * Time horizon: Do your clients' financial goals allow enough time to sustain an extended decline in the market? If they have a shorter time horizon, they are not going to be able to assume as much risk as someone with a much longer time frame. * Risk vs. reward: How comfortable are your clients with volatility? If they are extremely uncomfortable with the possibility of losing money, they might need less risky investments. * Financial situation: How much of your clients' total net worth are they investing? Clearly, if they are investing a large portion of their total net worth, they certainly would want to diversify. For example, if they come to you with an equity portfolio already in place, you may want to develop a fixed income portfolio to complement it. POTENTIAL BENEFITS OF USING MUTUAL FUNDS TO IMPLEMENT AN ASSET ALLOCATION STRATEGY Mutual funds are commonly used as a vehicle to participate in the different stock and bond markets. The benefits of mutual fund investing include: * Professional management: Mutual funds are managed by experienced investment professionals. …" @default.
• W130138546 created "2016-06-24" @default.
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• W130138546 date "2011-08-01" @default.
• W130138546 modified "2023-09-24" @default.
• W130138546 title "Asset Allocation Decision" @default.
• W130138546 doi "https://doi.org/10.1007/springerreference_746" @default.
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