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Effective Asset Allocation: For your Financial Wellness!

Studies have shown that proper asset allocation is more important to long-term returns than specific investment choices.

March 21, 2012 / 03:51 PM IST

Kinnari Raval,

Our health requires proper mix of  various food items to get us balanced doses of  protein, vitamin, iron and other minerals in the body to remain physically fit  and helping us fight health related risks.  Same holds good for our  financial wellness too, we need to diversify our money into various  instruments by taking into perspective our  risk taking ability, to enable us maximize returns thus wading the risk of sacrificing our  financial health.

Studies have shown that proper asset allocation is more important to long-term returns than specific investment choices. But since guessing which asset category will do best at a certain point of time is very difficult, thus it makes sense to divide your investments among various asset categories. But right understanding of this strategy holds the  key to investment success.

Here I will comprehend Asset Allocation for all you investors.

Asset allocation means diversifying your money in various asset classes. The goal is to help reduce risk and enhance returns. Establishing a well-diversified portfolio may allow you to avoid the risks associated with putting all your eggs in one basket.

 Important variables affecting  your Asset Allocation:
1. Prioritizing  goals:

Prioritization makes it  imperative that you have clearly earmarked goals.  Time management teaches that you should prioritize your goals / objectives which will help you to analyze that you are working upon important goals instead of getting caught into minor things. This will make sure that your money is parked  for significant purpose.

2. Risk Tolerance:

Risk tolerance depends on your age, income and financial goals. For instance, the risk which can be taken by a 30 year old cannot be taken by a person who is on the verge of retirement. As a 30 year old person generally has a longer time frame to make up for any losses he / she may incur on his / her portfolio.

3. Duration of goals:

Time Horizon is another crucial factor, which one should look at. Knowing that  time horizon is extremely important when it comes to choosing the type of investments you want to make and  asset allocation you want to do. As you need to take proper medicine for a particular  duration to  recover fast, similarly you need to fix  the time horizon  for a particular goal, so that you are able to build the  desired corpus  for that  goal in the stipulated time frame.  When you have longer time horizon, you can have aggressive asset allocation with more exposure to equity, but if time period is short then you cannot afford to do so.

I am sure that after keeping these aspects in mind you can have balanced  asset allocation.  But that

first published: Mar 21, 2012 03:33 pm