Greetings and welcome back to our ongoing blog on the stock market and all related topics. In the course of reading this blog, you’ve learned quite a bit about how investments work, but over the next few installments we’re going to look at something we haven’t really touched on yet.
What we’re going to be discussing is called Asset Allocation and it refers to the technique by which one builds a full portfolio of investments. You have probably heard that term before, but have you ever stopped to think about what it really means?
What Is Asset Allocation
Simply put, your portfolio will represent the sum total of your investing career, the big picture of everything you’ve accomplished by investing… or lost. What kind of picture will it paint for you?
In order to ensure that you have the healthiest portfolio possible, we’re going to discuss this technique known as Asset Allocation. The whole purpose of it is to balance out the risk that one takes with certain high risk investments against the other “sure thing” types of investments such as bonds.
Diversification Is The Key
You’ve probably caught on by now that each type of investment carries with it a certain level of risk, as well as a certain potential for return.
Therefore, the idea behind asset allocation is to not put all your eggs into one basket. Because you have a solid foundation of long term low risk investments such as bonds and derivatives, you can afford to take the occasional gamble on a high risk stock. Conversely, those high risk ventures will help to diversify your investments so that you’re not totally dependant upon any one class of investment.
There are five major tips to proper Asset Allocation, and it’s those tips that we’re going to be discussing as we follow along in this blog.
See you next week, where we get stuck into part 2 of Asset Allocation.
Sean Rasmussen
The Bullhunters Guide
Universal Wealth Creation © 2004 – 2009
{ 3 comments… read them below or add one }
The title of this blog intrigued me so came here to check. It is what I thought – not putting your eggs in a single basket – dumb me – which is what Sean says above!
We all hear about diversification and, it’s critical nature is borne out when we look at the events of the last 2 years of the economic downturn (well, that’s a euphemism, if ever there was one!)
Hi Sean,
Asset allocation is a great idea. It’s important to have a balanced portfolio so that if one sector is struggling, another will hopefully pick up the slack. Diversification is a must for all your income streams.
Because if all your eggs are in one basket, you’re in for a lot of trouble.
Diversification is always the key.
I like looking at pie graphs as I can see clearly how my assets are allocated.
You can do this with a spreadsheet, create a formula, input information about your assets and choose the pie graph feature and you get a good overall picture of how your assets are placed.