What is Asset Allocation?

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Asset Allocation

Asset allocation is the process of deciding how to distribute an investor’s wealth among different countries and assets classes for investment purposes. An asset class is comprised of securities that have similar characteristics, attributes and risk/ return relationships. In other word, asset allocation defined as investing money or well diversified in different classes of assets, as stocks, bonds and money market funds.

There are several risks that involve in asset allocation, such as liquidity needs, time horizon, tax concern, legal and regulatory factors and unique needs and preferences.
Risk Explanation
a. Liquidity needs - Asset is liquid if can be quickly converted to cash at a price close to fair market value. Investor may have liquidity needs that the investment plan must consider.
- Example, 25 years old investor probably has little need for liquidity as he focuses on his long term retirement fund goal. This constrants may change if should face a period of unemployment or near goal term. For 65 years old investor has a greater needs of liquidity.
b. Time horizon - Time horizon as an investment constraint briefing entered our earlier discussion of near term and long term high priority goals.
- Investor in long investment horizon generally require less liquidity and can be tolerate greater portfolio risk. Less liquidity because the unds are not usually needed for many years. Greater risk tolerance because any losses can be overcome by earnings and returns in subsequent years.
- In short time horizons favor more liquid and less risky investmnes because losses are harder to overcome during a short time frame.
c. Tax concern - Investment planning is complicated by the tax code. Tax complicate the situa...

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...rent products for each of section.

Many of individual stocks, mutual funds or index funds that met specific asset class needs. It also should be compare the costs associated with each types of investment. Index funds is a strong choice compare with any other asset class because minimize cost while outperform most of competitive active funds.

Since they are buying and selling assets, now is a perfect time to consolidate accounts or roll over a previous employer's 401k to a rollover IRA so that you have easier access to all investments and can more easily track the progress in the future.

Investor should make sure that keep track of asset allocation plan as time goes on and rebalance as needed to ensure portfolio maintains the risk exposure for investor’s age that defined.

References:

1. Investment Analysis and Portfolio Management, by Reilly Brown, 7th Edisio

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