Allocating assets and selecting investments

As we have mentioned previously

diversifying

can reduce risk inherent to any investment. For example when a company’s stocks from your portfolio decrease other stocks from the same could increase and surpass its losses. Diversification, however, does not reduce the market risk. If the market totally decreases stocks from a diversified portfolio will also decline.

When the market of bonds and stocks fluctuate downwards in association even a diversified portfolio is not immune when general turndown. Another element that would help battle the risk of the market is time. When selecting valuables for a long term period you may wait for the market to recover, so that you can sell at good price.

The valuables that you may choose depend on your objectives, personal situation (marital status, age, family, education, income, size and net value of your portfolio), risk level, expected return rate and the economic environment that surrounds you.

Allocating assets is the assignment of funds to a broad category of investments such as stocks, bonds, money market valuables, options, future, gold and real estate.

For instance if you are looking for an increase in capital and you are young, single and have an excellent income as a professional you can be able to tolerate higher risks in order to get higher returns. With a long term horizon and less need to generate incomes from your investments a great part of your portfolio could be made up of common stocks. In this case your asset allocation could be the following:

  • Stocks     75%
  • Real estate     10%
  • Bonds         5%
  • Equivalents in the money market  10%

But if you do not tolerate too much risk, a more conservative asset allocation would be like this:

  • Stocks     60%
  • Bonds      30%
  • Equivalents in the money market  10%

An adult couple, retired, with limited resources and whose objective is to generate incomes and preserve their capital, would have a different way to allocate their assets. They cannot handle too much risk and their time horizon is shorter. To generate acceptable incomes a wider portion of your portfolio would go to valuables with varied maturity dates, and fixed incomes. Normally, while more extent the maturity date greater the returns although risks may increase depending how extent the maturity date.

Depending on the circumstances a small percentage of your portfolio could be allocated in common stocks to get a capital increase. The suggested way to allocate your assets would be the following:

  • Bonds      65%
  • Stocks     15%
  • Equivalents in the money market  20%

As you may see the percentage allocated in bonds, stocks and its equivalents in the money market vary depending on the circumstances and size of portfolio..