Process of Asset Allocation

Asset allocation process is highly self-effacing and simple process. It varies from Person to Person due to Investment nature of everybody. Though People have similar goals and risk tolerance, no two Persons have the same asset allocation. Most individual investors engage an experienced investment manager to advice on asset allocation. Right mix among the various investment options helps the investor in achieving financial goals. The asset allocation process is a step-by step process that includes the following: 

Consideration of Investor’s Personal Situation: This is the first step in the process of Asset allocation. Before actually starting the asset allocation process, one has to first analyze the present financial situation by means of determining the assets, liabilities and net worth of the Investor that are available for investment. Even the tax status of the investor is to be analyzed. 

Considering Investment Objectives: Once Personal financial situation  of the investor is considered, investment objectives has to be created. The most important Investment objectives include maximizing current income and Capital preservation. 

Risk Tolerance and Investment Horizon: Risk tolerance is the willingness of everyone can accept risk for higher returns. Investment horizon is also important factor to be considered while allocating the assets. It determines the time period during which the investor begins to use the money.  

Determining the Asset Classes: Asset allocation includes determining the various asset classes to build the investment portfolio of the investor. Some of the common asset classes are stocks, bonds, cash etc. Apart from the mentioned, there exists another set of asset classes called ‘Alternative Investments’. Various asset classes available, along with risk return features and asset mix are also to be determined. 

Allocating the Assets: Once the asset classes and their mix are decided, the next step involves allocation of those assets according to the percentage decided. Making an effective and successful asset allocation plan requires time, effort and expertise. Consulting and engaging a financial planner for asset allocation for getting advice is also recommended by those investors who have limited or no knowledge of financial markets and who are not ready to expose to more risk. 

Reviewing and Reevaluating the Plan: Any change in the financial situation and investment objectives and in turn the asset mix. The allocation process therefore has to be reviewed and reevaluated on a continuing basis or periodically. 

Thus, it must be emphasized that the asset allocation decision requires a lot of information, sophisticated analysis and careful implementation, keeping the costs and benefits in view. Proper asset allocation is of utmost importance for the success of the overall portfolio strategy. The decision-making ultimately rests with those on whose shoulders the responsibility lies for ensuring that the required sums are accumulated or those who are directly affected by the targeted sums not being achieved. While the approaches and process may have undergone some changes over the years, the importance of the asset allocation decision has not changed. It is still the most important part of the investment decision-making process.