What Is Asset Allocation?

“Asset allocation” describes how investor arrange their portfolios, or distribute their investments in the many different kinds of securities investments. Asset allocation concerns how a portfolio is divided between stocks, bonds, money market investments and other security investments. Mutual fund managers, stock brokers and financial planners of all sorts concern themselves with matching the asset allocation of their clients with that person’s threshold of risk.

Investor Profile

Some investors are more willing to accept risk with their investments. This might be because a person has more money to invest and therefore wants to allot a certain percentage of that money to riskier (but higher yield) investments, or might simply be more of a gambler when it comes to investment. Other investors might be investing money in a long-term growth strategy for retirement, and therefore be more risk-averse with their investor Profile.

A financial planner will have an “investor profile” of their various investment clients. This investor profile (also known as investor style) simply records and analyzes the client’s investment preferences. Some factors in an investment profile are listed below.

  • “Risk tolerant” or “risk averse”.
  • Domestic investments or international diversification.
  • Stocks, bonds, money market assets or some combination of all.
  • Types of stock: “value”, “quality”, “cyclical”, “growth” or “defensive”.
  • Hands-on investment strategies or allocation in mutual fund types.
  • Active management in short term assets or the long-term “buy and hold” strategy.

There are other factors, of course, but these are some of the starkest contrasts in the asset allocation business. When a financial planner is allocating assets for a client’s portfolio, that planner will refer to the book on the client in determining where to invest. If you have a financial planner, give him or her as much information as possible. Let them know exactly what you want in your asset allocation, because brokers and financial advisers operate on the information you give them, either directly or indirectly.

Asset Allocation In A Bad Economy

asset-allocation

Having asset allocation strategies in a bad economy is more important now than ever, since the stock market is going through a rough time. Many portfolios are turning more conservative, since there are fewer can’t-miss investments in an economic downturn. Many investors are seeking out much more conservative investment opportunities than they were before the housing bubble burst. It’s a time of uncertainty, and people become instinctively more risk-averse during times of economic uncertainty.

Of course, this means that those who are risk-tolerant might find great deals on high-yield investments. Unless you have the money to spare (and, really, who ever does), you should keep your asset allocation relatively conservative at the moment. This is a matter of sifting through the options and matching the best odds with a reasonable interest rate or profit, so you want the odds on your side as much as possible.

Do to differing asset levels and personalities, everyone is going to have a different investor profile and different asset allocation strategy. Go over each of the asset allocation decisions listed above and consider where you stand, then talk to your financial planner about your preferences in asset allocation.