Asset allocation management is a process that many investors use to diversify their portfolios to best advantage. In the best of scenarios, effectively managing the allocation of assets within the portfolio creates a situation in which there is a viable asset mix, with some assets posting gains that offset losses currently incurred with other holdings within the portfolio. To engage in effective asset allocation management, there are a few basic tips to follow, including proper balance between asset types, considering the risk tolerance of each type of asset, and taking into consideration the overall financial goals of the investor.
Just like any investment strategy, the idea with asset allocation management is to acquire securities that are likely to generate returns at a rate that is considered acceptable by the investor. Since different classes or types of assets generate different levels of returns, there is a need to select several asset classes for inclusion within the portfolio. For example, an investor may choose to go with an asset mix that includes stocks, bonds, commodities, and even some real estate holdings. Some investors seek to maintain a percentage balance between the different classes, depending on what is happening with those types of assets in general. While periodic review of market events and the impact those events are having on the assets held is important, going with a percentage approach can provide structure to the portfolio that makes it possible to maintain the balance even when it is necessary to sell off some assets and acquire others in order to keep returns within reason.
As part of the process of buying and selling assets for the portfolio, responsible asset allocation management requires considering the degree of volatility involved with each asset currently held. Doing so makes it easier to consider both short- and long-term benefits and liabilities of continuing to hold each asset. At the same time, being aware of the risk tolerance of each asset in the portfolio can help determine if the balance between each type of asset is right for today’s market. For example, if stocks are going through a downturn, the investor may be wise to increase the percentage of the portfolio that is focused on the more stable bond issues. Keep in mind that once stock options begin to level and eventually climb again, it is always possible to revisit the allocation percentage to each type of asset and adjust accordingly.
With proper asset allocation management, the investor must also consider his or her own personal investment philosophies and goals. This often means considering the reason behind acquiring the assets in the first place. If the idea is to prepare for retirement, the focus is often on acquiring assets that are highly likely to hold their value and generate steady returns with relatively few periods of downturns. For investors who are looking to amass considerable returns in a short period of time, going with riskier investments that hold the promise of more spectacular returns will influence just which assets are purchased and in what quantities. Keep in mind that what amounts to effective asset allocation management for one investor may be inappropriate for another, based on those goals and structure your management process to meet your needs, not the needs of someone else.
