Mastering Asset Allocation

The Key to Building Your Wealth Portfolio with Confidence

Do you know the reason why Silicon Valley Bank failed?

SVB set a contagion effect into motion, roiling markets from Toronto to Auckland.

 

Because they put all their eggs in one basket. 

 

What did they do? They put most of their customers' deposits into long-term bonds, and as interest rates rose, they faced losses of over $15 billion on their portfolio.

 

This set into action a set of events that eventually led to the closure of the bank before eventually being taken over by the Federal Deposits Insurance Corporation.

 

 

Know what is asset allocation

 

Asset allocation is the process of dividing an investment portfolio among various asset classes, such as stocks, bonds, real estate, and cash, to achieve a desired risk and return objective.

 

The goal of asset allocation is to balance the potential risks and rewards of different investments to achieve a level of diversification appropriate for an investor's individual goals, time horizon, and risk tolerance.

 

Asset allocation is often considered one of the most important investment decisions an investor can make. It is a critical component of a well-diversified portfolio because it helps to reduce risk by spreading investments across different asset classes that behave differently in different market conditions.

 

By investing in a variety of asset classes, an investor can reduce the impact of any one asset class on their portfolio's overall performance.

 

So, how to allocate assets?

 

The asset allocation process involves determining how much of an investment portfolio should be allocated to each asset class based on an investor's risk tolerance and investment goals.

 

Investors can choose to invest in a single asset class or a combination of asset classes. The asset allocation decision is based on several factors, including an investor's financial goals, risk tolerance, investment time horizon, and investment experience.

 

The three main asset classes are stocks, bonds, and cash. Stocks represent ownership in a company and are generally considered to be riskier than bonds or cash. Bonds are fixed-income securities issued by companies or governments and are generally considered less risky than stocks.

 

Cash, or cash equivalents such as savings accounts or money market funds, are considered to be the least risky of the three asset classes.

 

In addition to the three main asset classes, investors may also consider investing in other asset classes, such as real estate, commodities, or alternative investments, such as private equity or hedge funds. These asset classes are generally considered to be more speculative and may not be suitable for all investors.

 

 

How to allocate assets in a portfolio?

 

The asset allocation decision should be based on an investor's risk tolerance and investment goals.

 

Investors with a high-risk tolerance may choose to invest a larger portion of their portfolio in stocks or other higher-risk asset classes, while investors with a lower risk tolerance may choose to invest a larger portion of their portfolio in bonds or cash.

 

Asset allocation is not a one-time decision. Investors should review their asset allocation periodically to ensure it remains consistent with their investment goals and risk tolerance.

 

Market conditions can change, and the performance of different asset classes can vary. Therefore, investors may need to adjust their asset allocation to maintain the desired level of diversification.

 

Is there a method for allocating assets?

 

Yes, there are methods for deciding how to allocate your investments to different asset classes.

 

Asset allocation decisions can be made using different methods. Some investors may choose to use a strategic asset allocation approach, while others may opt for a tactical approach to investing.

 

Do you want to be strategic or tactical?

 

Strategic allocation involves setting a target allocation for each asset class and maintaining that allocation over time. The tactical asset allocation approach consists in adjusting the asset allocation based on market conditions or other factors.

 

You can also choose to mix both approaches, which is a combination of strategic and tactical asset allocation. For example, an investor may set a target allocation for each asset class and adjust the allocation periodically based on market conditions or changes in their investment goals.

 

Asset Allocation Is Central To Investing

 

Asset allocation is a critical component of a well-diversified investment portfolio.

 

The SVB bankruptcy case demonstrates the importance of asset allocation.

 

Also, remember that asset allocation is not just a one-time process.

 

You must periodically review your asset allocation plan as goals and situations evolve.

 

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