For example, if you are a 25 year old, you want to choose assets that have a higher risk because you intend to work for a good number of years. However, if you are 60 years old and plan to retire at 65, you would more than likely desire more a conservative investments allocation.
Some investment allocation choices include:
Cash. Cash is considered a very liquid investment. This can include money in a savings account, a money market account or any other account where you can easily deposit or withdraw the amount of money. The rate of return on these types of choices is usually very low.
Real Estate. You don't have to be an apartment owner to have real estate investments. In fact, anyone who owns a home has an investment in real estate. When figuring out your asset allocation, don't forget assets that you may take for granted.
Over the long haul, real estate has tended to increase in values. However, there is still risk associated with this type of asset.
Stocks. Stocks are considered ownership in a company. Many individuals are given stock options from the company they work for. Others may just decide to purchase a specific company's stock on their own.
By having ownership in the company, you are linking that specific investment to the healthiness of the company. For someone who purchased Enron stock, the decision was a bad one. For someone who purchased Microsoft at the initial roll out, the decision was a great one.
Bonds. Bonds are basically a debt. If you are to purchase a bond from a company or a government agency, you are basically giving the bond issuer a loan. The bond will state the repayment terms and interest rate. Repayment terms are usually very long-term, such as ten years or more.
For the most part, bonds are usually pretty stable, so long as the issuer is stable. Junk bonds have been the riskiest as they are rated risky by credit rating agencies.
Precious Metals/Natural resources. Do not forget the diamonds! Or gold. These types of investments are usually considered safe during troubled financial times. But even without troubled times, some individuals just like to purchase these types of assets.
The overall goal of diversification is to gain assets that have little to no correlation to each other. For example, gold may rise, real estate may fall, but they are not linked together so market downturns won't mean a huge portfolio drop.
Asset Allocation For Dummies
Many of the wealthiest people in the world owe their fortunes to different types of residual income – from stocks and bonds to investment trusts, real estate, commodities and more. In this chapter we're going to discuss the importance of asset allocation – how you spread your assets into different types of products (from safe to speculative).
When we talk about asset allocation we refer to the various vehicles in which we invest our cash. We can split our assets into three specific classes – security, buy/hold and speculative. It is advised that the largest chunk of your assets should fall into the security (approx 70%) bucket and this includes assets such as cash, ISAs, pension funds, home of residence, safe bonds and government securities. These are the safest of assets.
The next type of asset class is the “buy & hold” variety – these tend to be longer term investments that are generally safe. Assets in this class include buy & hold stocks/mutual funds and investment real estate. This type of asset is generally solid with the stocks being of high pedigree with sound fundamentals that promise much for the future. The buy & hold chunk of your total assets should include approximately 15% of your entire assets.
Finally, we come to the speculative class of assets – these are higher risk products that you jump in and out of quickly for short term financial gains. These include stocks that you trade actively (jumping in and out within a few days/weeks), IPOs, options & futures, warrants and some of the more speculative mutual funds.
Before you decide to enter into stock investment it is worth drawing up a plan so that you can set your own rules about your asset allocation (and discover where you are right now). Ultimately, The 70/15/15 rule to asset allocation will depend upon the individual investor, their risk tolerance and their mindset. You can adjust the numbers to more closely match your attitude towards risk.
Many experts believe that the asset allocation proportions should vary according to the investors age. For example those aged 40 or below may wish to employ a more aggressive strategy where only 40% of assets are in security and 30% are held each in buy/hold and speculative investments. Again, your personal circumstances, preference to risk and other influencing factors should be considered before arriving at your personal asset allocation numbers.
Your Investment Plan – The Most Important Thing To Create Before You Risk Even One Penny In The Markets.
One of my online businesses helps provide information and products to help other people set-up their own dot com businesses. One of the first things I advise my clients is to create a plan for their business. A plan puts all those thoughts in your head together, combines then with practical facts & figures and gives them a blueprint to get to exactly where they want to be in a structured and efficient way.
You've heard the motto, if you fail to plan, you plan to fail! This applies as much (if not more) to investments as it does to anything else in the world.
Here are just a small sample of things that your personal investment plan should highlight:
1. What amount of money you have available to invest and how this sum will be allocated within each different asset class.
2. How will you find suitable investments? Will you learn about them yourself or will you seek out professional advice (for example brokers or follow investment gurus).
3. How you will cope psychologically when your investments turn against you. The market moves heavily on psychology and how you react to situations can be the difference between winning and losing.
4. A more detailed plan should be created for each investment outlining the reason for the investments, as well as an entry and exit strategy.
To try and start investing without a clear plan is asking for trouble.
Remember - before you even look at an investment report, you MUST decide how your wealth will be allocated and then draw up a long term investment plan that's right for you.
Both Caterina Christakos & Tuks Engineer are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Caterina Christakos has sinced written about articles on various topics from Attracting Mate, Forex Trading Forex and Financial Planning. Caterina Christakos is an experienced investor and instructor with World Capital Institute. Ever imagined yourself as a stock or commodities broker? Check this out:
