Investment Strategies: Asset Allocation

Asset Allocation

Asset allocation is about not putting all your eggs in one basket. It's the ultimate protection should things go wrong in one investment class or sector, as is likely to be the case from time to time.

Asset allocation is the implementation of an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investor's risk tolerance, goals and investment time frame. Asset allocation is based on the principle that different assets perform differently in different market and economic conditions. Asset allocation is both the process of dividing an investment portfolio among different asset categories, as the resulting division over stocks, bonds, and cash. This process of determining which mix of assets to hold in a portfolio is a personal one. The asset allocation that works best at any given stage in an investor's life will depend largely on the need, ability and willingness of the investor to take risk. These depend on the investment time horizon and on both the investor's financial capacity and emotional capacity to tolerate risk and to stay the course.

A key reason for devising an asset allocation strategy is to help reduce the risk inherent in volatile equity asset classes that are expected to provide higher returns by combining these asset classes with more stable fixed-income assets. These balanced portfolios help reduce volatility and down-side risk, thus better enabling an investor to maintain investments over a long term period.

There is a nice article I found on the the website of American Association of Individual Investors about asset allocation. You MUST read this article to get some more detailed understanding on asset allocation. Click on this link to read this article.

You can also use this Asset Allocation Calculator on Bankrate.com website to determine how you should diversify your portfolio to allocate your assets.