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Asset
allocation is about not putting all your eggs in one basket. It’s your
ultimate protection if things go wrong in one investment class or
sector, as is likely to be the case from time to time.
Asset allocation invlolves dividing an
investment portfolio into different asset categories. Common asset
categories include:
· Equity
· Debt securities
such as government bonds or company deposits
· Bank deposits/
fixed income securities such as postal deposits
· Illiquid assets
such as your property or jewellery
· Other assets such
as art.
The
choice of mix of assets to hold in your portfolio is a very personal
one. The asset allocation that works best for you at any given point of
time in your life will depend largely on your time horizon and your
ability to tolerate risk. Here are some factors that influence asset
allocation:
Time Horizon: The expected
number of months, years or decades you will be investing to achieve a
particular financial goal. An investor with a longer time horizon may
feel more comfortable taking on a riskier or more volatile investment
because he can wait out the inevitable ups and downs. By contrast, an
investor saving for retirement or a child’s education is likely to take
on less risk because he has a shorter time horizon.
Risk Tolerance: Your ability
and willingness to lose some or all of your original investment in
exchange for greater potential returns. An aggressive investor, or one
with a high-risk tolerance, is more likely to risk losing money to get
better results. A conservative investor, or one with a low risk
tolerance, tends to favour investments that will preserve the original
investment. As the famous saying goes, conservative investors keep a
‘bird in hand’, while aggressive investors seek ‘two in the bush’.
Taxes: You may prefer
to invest in assets which will save you a bundle in taxes.
Obligations: With aged
parents who are dependent on you, you need to plan for their medical
expenses/insurance. For young children, you need to save for their
education.
Other
pages on Financial planning: Introduction
Retirement
Planning
Disclaimer: The
information provided here is only for informative purposes and nothing
more. It is not in any way to be construed as authoritative. Always
consult your financial advisor before taking any decision. It is
informed to the people that this information that is provided here is
not to be acted upon. In spite of our advise, if any person acts upon
the contents of this web site and incurs a loss, they do it on their
own risk. We are not to be held responsible for any loss, incorrect
information etc.
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