How to Implement an Asset Allocation Strategy
Asset allocation is the process of investing your money in a diverse set of various asset classes. Some of the most common asset classes are stocks, bonds and real estate. The goal of asset allocation is to both increase return and lower risk to the investor.
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Things You'll Need
- Money to invest
- A good investment plan that is designed specifically for your particular needs and tolerances for risk
- A brokerage account
Instructions
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First you will need to have a basic understanding of asset allocation. Key concepts include diversification of asset classes, rebalancing of your portfolio, and correlations between asset classes. There are several good books that explain these in detail.
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After you have an understanding of the basics, you will need to understand what investment plan is best for you. This is influenced by your age, your goals, your existing savings and your tolerance for risk. Younger people typically take on more risk because they have a longer "horizon" to help smooth out the ups and downs. Pre-retirement people take on less risk, as their horizon is much shorter and they will soon need to start drawing some of their living expenses from their portfolio.
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A well thought out investment plan will help you decide what mix of stocks, bonds, real estate and other assets to hold. It is important to rebalance your portfolio at least once per year to make sure you are sticking to your plan.
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Your investment plan will likely change over time. So as you get older, make sure to re-evaluate your plan and make any necessary changes to your portfolio.
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Tips & Warnings
Don't assume that you need an investment advisor. If you do decide to hire an investment advisor, do your research and don't pay more than .5% in annual fees.
Index funds and exchange traded funds are a great low-cost way to diversify your portfolio.
Some investment advisors are compensated for pushing particular investments. Make sure your advisor is clear with you that they don't get any compenstation for selling you particular investments.
Some mutual funds charge more than 1.5% in management fees. Try to stay away from these as they tend to not perform as well as cheaper mutual funds and index funds.
