Asset allocation refers to the percentage of stocks, bonds, and cash in your portfolio. ... In contrast, diversification describes the spreading of your assets across the various asset classes within each of those three allocation buckets to further reduce risk.
How does asset allocation enable you to accomplish diversification? a firm's future performance is uncertain, so are the stock's value and the return that you will earn from investing in the stock. ... By constructing a portfolio of assets, you diversify across several investments rather than focus on a single investment.
Factors Affecting Asset Allocation Decision
You can rebalance your portfolio at predetermined time intervals or when your allocations have deviated a certain amount from your ideal portfolio mix. Rebalancing can be done by either selling one investment and buying another or by allocating additional funds to either stocks or bonds.
Your ideal asset allocation is the mix of investments, from most aggressive to safest, that will earn the total return over time that you need. The mix includes stocks, bonds, and cash or money market securities. The percentage of your portfolio you devote to each depends on your time frame and your tolerance for risk.
For years, a commonly cited rule of thumb has helped simplify asset allocation. It states that individuals should hold a percentage of stocks equal to 100 minus their age. So, for a typical 60-year-old, 40% of the portfolio should be equities.
Asset allocation helps investors reduce risk through diversification. Historically, the returns of stocks, bonds, and cash haven't moved in unison. ... In other words, asset allocation matters a lot more than stock picking when it comes to reaching your financial goals!
Geographical/international diversification can improve firm performance by increasing sales in foreign markets, reducing the risk of economic downturn in the home market, lowering costs through economies of scale in manufacturing, R&D, marketing and distribution system (Sarathy, Terpstra and Russow,2006 ; Contractor, ...
Asset allocation involves dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash. ... The asset allocation that works best for you at any given point in your life will depend largely on your time horizon and your ability to tolerate risk.
Asset classes include cash, bonds, or stocks. Look at the long-term expected returns and risk level of each asset class when deciding on the target percentage for each class. Stocks are the riskiest, bonds are less risky, and cash is the least risky.
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