There are different types of Financial Asset types some examples being Stocks (Equities and #MutualFunds ), Bonds (Debt papers), Cash (liquid asset), Gold, Real Estate.
Each Asset type has a unique risk factor associated with it . e.g. Equities are riskier than Bonds (Debt). Risk here means volatility – fluctuation in its value over a fixed time period.
Each Asset type also has a unique cycle across which it reaches a peak and a bottom based upon which investors are advised to keep in mind investment horizons for investment in each of these asset types.
For example if an investor wants to deploy some money for investment for the next 3 years only, he should never invest this amount in Equities since Equities generally need 5 years and more to post a decent return on investment.
Each Asset type also has a unique range of returns on investment ,historically speaking ,and this is generally taken to be the expected rate of return although nothing is guaranteed. The riskier the asset class, the more could be the expected rate of return.
It would be foolish to deploy all our money in any one Asset class. We will end up either taking a very high risk and potentially loosing a large part of our money or we will end up being super safe but not having enough returns on our investment to beat inflation thus resulting in erosion of our wealth.
#Assetallocation is the middle path, the balanced approach where risk and return are balanced by distributing our money in different proportions among all the asset classes. This proportion is decided by one’s risk appetite.
An investor’s risk appetite is generally decided by his life-stage and financial responsibilities.
A young graduate has no dependents , hence can take higher risks and invest a high proportion of his money in equities. A 40 year old with two children and a family to support will not be advised to put a high proportion of his money in equities since he has multiple short-term and long-term financial goals to meet and hence needs a stable income/growth from his investment portfolio.
The definition of an ideally allocated investment portfolio changes with the owner of the portfolio but in general should provide the following outcomes for the investor…
1. It’s volatility should not affect the cash flows required from the portfolio to meet the investor’s financial goals.
2. It’s risk should not exceed the risk capable of being borne by the investor. None of the financial goals should suffer due to excess risk taken.
3. It’s return should be commensurate with the risks taken.
4. It’s return should not be so low that one does not beat inflation. Wealth should not get eroded.
Portfolio Re-balancing is another important step investors forget to implement in the flow of emotion. It is not uncommon to have investors forget about their pre-decided allocation ratios in a bull market and allow their equity allocation to run up so high that a subsequent market correction wipes out all gains leaving them in tears. Similarly it is not uncommon to see investors tremble at the prospect of investing more into equities when the market incurs a significant correction.
What should actually be done is booking profits when our equity allocation overshoots our pre-decided level to bring the allocation to target levels. Similarly we should be investing more when our equity allocation dips significantly below our pre-decided levels. This needs discipline and also a choice of correct products which is where a good #MutualFundDistributor performs a very important role by monitoring your portfolio and regularly communicating with you.
Connect with us at Green Tree Distribution - Mutual fund Specialists and we will ensure that your investing needs are attended to and our quality reporting of your portfolio will assist you in making the right choices for your #investmentportfolio