Investing isn’t as simple as blindly picking any stocks at your liking. It involves careful decision making, thorough analysis, and complete understanding on the risk and reward of investing. The key to making a profitable investment is to invest in a well-maintained portfolio. In line with this, asset allocation plays a very big role. It needs to conform to the investor’s risk tolerance, financial capacity, age, and goals. In order to systematically allocate assets in your investment portfolio, every investor must follow these steps:
Step 1: Determine your asset allocation
Investing doesn’t mean simply throwing all your money on stocks. There are different types of securities you can choose from, and the ideal portfolio will usually include several asset classes. Determining which asset class to invest in is entirely up to you, but make sure that you at least invest in a mixture of stocks and bonds.
Determining your asset allocation depends on several factors: your age, time horizon, financial capacity, and risk tolerance. For example, using your age to figure your assets would be:
110 – your age = the percentage of your assets that should be composed of stocks
Following the computation above, if you are at the age of 35, you would need to put 75% of your portfolio in stocks. This is also the percentage of risk that you should expose. Bonds are more of a low-risk investment, so the remaining 25% is left in good hands. Just remember that despite the high risk of stocks, they also usually end up with high rewards.
Step 2: Diversify your assets
Now that you know the proper asset allocation for your age, it’s time to choose your investments. Avoid investing mostly on stocks from a single industry. Stocks are very risky investments, so the key here is to practice portfolio diversification. Try investing in a broad range of asset classes. A good tip is not to invest only on local stocks, but to international stocks as well.
Step 3: Add some index funds
To add more security for your portfolio, add in some index funds to your assets. An index fund is a pool of assets that is designed to replicate the performance of a particular market index. It provides instant diversification while paying for lower fees. Aside from these, they also guarantee higher returns over the long term.
Step 4: Rebalance annually
Once you’ve created your portfolio, it’s time to forget about it. Yes, you don’t need to check on your assets every hour. The rule of thumb is to invest for the long term to make the most out of the market. The only thing you need to do is rebalance your portfolio annually. You could sell some assets or buy some in order for it to match your original asset allocation.
Step 5: Adjust your portfolio as you age
As you approach retirement age, you should adjust your portfolio to less-risky investments. The nearer you are to retirement, the more secure you should be on your investments. This is to ensure that you would have enough money once you retire. However, if you think that your investments would not generate enough money for you by the time you retire, you might as well fix it early or simply postpone your retirement until such time that you save enough.
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