Asset allocation is an effective way to help manage risk within your investment portfolio.✔
Financial assets and investments can be grouped into 3 main classes😎:
Fixed income investments✨
Each asset has different levels of risk😈 and expected return and for that reason they will all behave differently over time. E.g stocks are known to be more riskier than bonds but over the long term they offer much better return than bonds😍. This means that if you are young then stocks might carry a greater weighting in your portfolio than bonds as you have more time to make a good return or reinvest your capital if you don't get the expected return.
A much older investor on the other hand will not have so much time and will opt for a safer investment with better guaranteed returns such as bonds.
Our asset allocations are based on our financial goals, timeline and risk tolerance.
As we get older and get closer to retirement we tend to modify our portfolios buy reducing equity allocations and increasing fixed income allocations in a bid to increase returns, reduce volatility and reduce risk.🔥
Investment assets in the 3 investment classes may behave differently over time and this is why rebalancing your portfolio is key to great asset management🏙.