Managing Risk
In a way, asset allocation is like a well-balanced meal, which provides for the right dose of carbohydrates, proteins, fats, vitamins and minerals. Just the way a balanced diet, helps in one’s growth, asset allocation helps build wealth. There is plenty of research to indicate that about 90 percent of the variance in a portfolio’s investment returns over time is explained by asset allocation. Thus, the process of determining the percentage of portfolio assets allocated to specific asset classes such as stocks, bonds, real estate and precious metals become very important.
When investing for a financial goal, asset allocation works well as it works towards maximising returns at a prudent level of risk or to minimise the risk involved in achieving a certain return. The process of determining the appropriate asset allocation involves an analysis not only of available investment choices but also of the needs and preferences of the investor. These are the basic building blocks of an effective asset allocation.
Explore the video to understand how asset classes react to risks.
Read- Begin with asset allocation