Asset Allocation

Asset allocation is an investment strategy that investors use to diversify investments among various investment vehicles such as stocks/bonds/mutual funds/real estate etc. It is an important tool to achieve financial goals.Asset allocation helps in avoiding day to-day decisions in investing. For any financial planning process to be successful, it is always advisable to review the investor’s portfolio periodically to see whether the current asset allocation is meeting the required financial goals.Any change in financial goals or risk tolerance of the individual causes a change in allocation of assets. Studies indicate that 90% of the difference in returns between portfolios is due to asset allocation and not due to market timing or stock selection.


Asset allocation is the most important process for an Financial Planning.It plays an important role in determining the performance of an investment & It is influenced by market outlook,time horizon and diversification.To execute the process of asset allocation with an Individual s Financial objectives and constraints, risk and return estimates of each asset class and correlations between asset classes. 


Some of the most common asset classes that comprise an allocation are: Money Market and Short-Term Bonds, which comprise cash, savings accounts, term deposits and less than one year investment grade bonds; Bonds, which cover investment bonds; Domestic Equities, which are listed on the stock market; International Equities that are listed in or related to a foreign country; Real Estate/REIT s that include real estate and stocks related to property. 

There are two common pillars that manage an investment portfolio and acts as a guide in asset allocation process – investor pillar, and market pillar 2
. 
• Investor pillar identifies the goals of the client, current net worth, risk tolerance 
   level, and acceptable returns. 

• Market pillar looks at various asset classes available in the market, procedures, 
  and expected risk and return.


Advantages of Asset Allocation

• Asset allocation helps in developing and implementing ones’ own financial plan 
   that suits their goals and objectives. 
• Asset allocation helps in avoiding the devastating effects of a stock market crash 
   or bearish market. 
• Asset allocation helps in minimizing the risk and enhancing the returns. 
• Asset allocation helps in avoiding market timing. 
• Asset allocation helps in smoothing volatility of investment portfolio and overall 
  rate of return. 
• Asset allocation not only calculates the expected returns but also governs a 
  portfolio’s risk levels

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