Strategies and Concepts of Basic Investing : Basic Investing Strategies Part- 2

- Continue from Part- 1 -

Strategy No.2

Asset Allocation:

Asset allocation is yet another way to differentiate your investments. It takes lead of the fact that when it comes to risk and reward, financial categories like stocks, bonds and money-market accounts all behave quite differently. 

Let us look at the three asset classes that are available in the market before we can apportion them.

Stocks, for example, offer the highest returns among those three asset but they also carry the highest risk of losses. (High Risk, High Returns)

Bonds aren't so rewarding, but they offer a lot more stability than stocks. (Average Risk, Average Returns)

Money-market returns are small, but you'll never lose your initial investment. (Low Risk, Low Returns)

An asset-allocation strategy lets you looks at your specific goals and positions (financially) and determines the best asset mix that gives you the optimal blend of risk and reward.

Here's an instance. Say your goal is retirement.

When you're in your 20s or 30s and have time to make up for short-term market losses, an asset-allocation outline would put you deeply into stocks, maybe 100% of your savings and you might even flavour it up with a mix of large-company stocks, small-company stocks and international stocks to spread your exposure within the category.

As you moved into your late 30s and early 40s, You'd probably want to add some bonds to give your portfolio some stability and income. Maybe you'd shift to a 70/30 blend -- still favouring growth, but not exaggerate it because the closer you are to your retirement age, the more you would surge up the bonds and leak off the stocks.

And in your last few years, when you just could not afford big market fatalities, your portfolio would be weighty on short-term bonds or money-market funds -- the least risky of all investments.

If you're serious about it, this model also helps you buy low and sell high.And If you "rebalanced" this way each year, you'd always be trading expensive assets for those with more growth potential.