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[R288]Return On Stock Market

by Justin Demerchant, Jus

The diversification of portfolio may be difficult to understand but it is imperative that the prospective investors should look at the positive things that can be delivered by this investment move. The diversification of portfolio in the market can be properly seen and understood by learning what traditional asset allocation is. In fact, in order to diversify portfolio a person may need to understand how asset allocation works.

In the traditional way of allocating assets, a person allocates fixed or static allocations on different asset classes or investment types. By tradition, it is always suggested that a would-be investor should consider bonds, stocks, cash and real estate as asset classes. By using asset allocation, the typical advisor will recommend how much the total investment portfolio should be allocated on these different assets or type of investments. If a would-be investor will set his moist eye on the fixed asset allocation, then this move will have a great impact on moderating possible portfolio risk. This kind of strategy will work in the market by using different assets that has low statistical correlation. This means that the movement of the investments will not thread the same line. By using this kind of strategy in managing the portfolio, the would-be investor hinges on the belief that the investments will not fall at the same time or raise at the same time. If it happens as planned, then large losses can be avoided in the market.

The other way of allocating the resources in the market is called as the dynamic approach. This is also known as the tactical or the active asset allocation. This has grown in popularity over the years, thanks to the many computerized market timing techniques. These are the tools that have the capacity to analyze and predict market movements. Though it is debatable that these technologies can predict the movement of the market, it cannot be denied that this can of asset allocation strategy is helpful in the market. What this method can do best is to follow the market trends and from there the would-be investor can make informed judgments.

But why is there are need to talk about these two types of asset allocation? Well these strategies can be helpful for someone interested in stocks as these strategies can help the investor diversify his portfolio in the right direction. The investor can make use of the traditional way of allocating scarce resources, or he can opt for the more modern way of doing it and that's thru the use of technologies.
Whatever the strategies employed, diversifying the portfolio is an important move. In fact it's a no-brainer and everyone in the business should know this sacred rule. It is always better to evenly allocate scarce resources on different portfolio, than putting it all in one asset type. No one has a lock on the market, and any time that market will move up and down. Betting on one investment type means that the once that investment crashed or its niche market crashed, the investor will have to say goodbye to all his assets.

Less than 0.8% individual investors have effective asset allocation for their investment. And 97.9% of novice investors don't even know how to allocate their cash prior to investing in stock market. In this article, I'm going to share with you the suggested asset allocation that I used myself for your own references.

I bet you must have heard someone saying "invest only with money that you can afford to lose". At least, this is what I'm always saying to myself and to all my loyal readers. Nevertheless, when I said so, many reply back to "how much exactly?". They are hoping some figure or percentage that they can start applying in their cash management. So here we go,

Easy Money for Medium to High Risk Investment

First of all, high risk investment is highly subjective to individual risk tolerance. Something risky for me might not be risky to you at all. It's depend on your knowledge, skills and experience when dealing with such opportunities. And of course how confident are you dealing with external factors that are beyond your control; such as market volatility and commodity uncertainties.

But for me, medium to short term trading are considered as medium to high risk investment. And therefore, I personally allocate "easy money" for this activity. Easy money includes but not limited to bonuses from your employer, gratuity after you retire, or dividends from existing investment. With money that I can afford to lose, I can trade stocks with emotionally detached.

40% Cash for Low Risk Investment

You might want to apply this suggested asset allocation since you can comfortably put most of your hard earned money into something that you have faith in it. And to me, I consider buying great stocks at cheap price as the lowest risk investment ever. This is just like buying Berkshire Hathaway shares at only $10,000.

Isn't that a no brainer investment decision?

However, the challenges are finding good stocks and have patient not to buy them unless the share prices are "cheap enough". You can do this by first identifying potential stocks that worth investing. After you have shortlisted them all, try to determine how much each stock worth by calculating its intrinsic value. Then, buy the stocks once the share prices are within the margin of safety. After all, this is what Warren Buffet did all this while.

40% Cash Reserve to Further Diversify

If you are thinking of putting all of your hard earned money into stock market, think again. The fact is, limiting your investment in one asset classes alone; such as stock market only, can bring disaster. No matter how good your investing skills and how much you have diversify your money into different stocks across various industries, I found it just not good enough.

Consider diversifying into other asset classes such as real estate or maybe building your own businesses as well.

I prefer buying high end properties than others since that market segment seems to be less susceptible to economic condition. Real estate investment is a good platform for you to understand how businesses works, especially your negotiation skills. Slowly, I venture into some other businesses to increase my return on investment. From such activities, I have better understanding on which stocks to invest.

Article Source : Pg. 208

About Author

Both Justin Demerchant & Zainul Anuar 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.

Justin Demerchant has sinced written about articles on various topics from Video Games, Video Games and Health. Justin DeMerchant is the founder of ,. Justin Demerchant's top article generates over 27100 views. to your Favourites.

Zainul Anuar has sinced written about articles on various topics from Stock, Finances and Astrology Predictions. Want to invest like Warren Buffet? Learn and. Zainul Anuar's top article generates over 5400 views. to your Favourites.