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Elements of Asset Allocation
Several factors are considered
in determining the best possible combination of investments. Age,
tolerance for risk, and investor’s time horizon are just a few
considerations in determining the correct allocation
for investors. Other important factors include the interaction
between different asset classes with one another.
Rebalancing
Once your personal allocation is determined, the next
challenge will be to maintain that particular mix despite
market fluctuations. This is achieved through rebalancing
and can be done at different time intervals using certain
investments. The importance of rebalancing is illustrated
below.
Suppose your particular mix was made up of 20% Investment
A, 50% Investment B, and 30% Investment C before the
market rise. Your allocation would look like this:
Now suppose that Investment A grew disproportionate
from the rest of the portfolio and now made up 60% of
the overall portfolio. Your account would look like the
pie chart below at the rise of the market. Consequently,
as a result of the market’s advance, Investment
A is overpriced and yet makes up 60% of the portfolio
while Investments B and C are priced more reasonably.
Rebalancing the account would provide the opportunity
to sell Investment A when it becomes overpriced and purchase
Investments B and C when they are reasonably priced. Moreover,
maintaining one’s appropriate allocation weighting
is the hallmark to disciplined investing.
Is Your Portfolio Properly Allocated?
Factors such as, Market fluctuations, changes in your
personal life, and time could require you to reassess
your current investment portfolio.
Below is a questionnaire for you to complete if you
would like to have your current portfolio evaluated. First,
begin with the risk questionnaire and complete the breakdown
of the different asset classes you hold.
Risk Questionnaire
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