What is the role of asset allocation in my investments?

What is the role of asset allocation in my investments?

The single best control mechanism over the performance of your investments is the maintenance of an asset allocation strategy.

When testing various methods of predicting and controlling returns in a portfolio, researchers found that having and maintaining an asset allocation strategy was the method that reaped the most predictable returns – with 80-90% accuracy.

Asset allocation is the distribution of various asset classes and investments into a portfolio mix in a deliberate way to gain specific amounts of exposure to each investment. It is a practice used to diversify and manage risk. Asset Allocation is a dynamic process; it’s not something you do once and forget about.

You might need to apply a rebalancing strategy to maintain the allocation you’ve chosen, or you might find that the distribution among asset classes needs to be tweaked occasionally.

It may change along with the current economic environment and market developments, or your personal financial situation. One mutual fund that served a specific purpose before may need to be replaced by another to maintain the original intention of the allocation.

Risk tolerance, time horizon, and investment objectives will be among the factors that determine the appropriate asset allocation, and it may end up being quite a jumble of percentages if done thoroughly. Computers are almost always necessary to create an ideal asset allocation.

If you have access to a good one, you can do this on your own, but, if you feel the need to double-check with a financial advisor, he or she can run the calculation on their own computer. They may also have some insights that you wouldn’t have been aware of on your own.

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