When allocating assets, you’re simply doing another kind of investment strategy. Asset allocation’s main goal is to balance the risk and rewards that you can get out of your investments. You can do asset allocation by allocating a portfolio’s assets based on different factors.
When try to allocate assets, you have to consider many things, including your goals, strategy, time horizon, and risk tolerance. The following are some of the most important factors that you should not forget to consider when doing asset allocation.
Asset Class
This is the most important factor that you will have to consider.
Overall, there are three main asset classes, which are equities, fixed income, and cash and equivalents. Since these are different classes, they also sport different levels of rewards and risks. It is important to understand how different asset classes work and how they behave.
The more you know about the nature of the asset class, the better you allocate it. It helps for strategic planning towards achieving your goals.
Other main asset classes include cash and currencies, commodities, bonds, and stocks. This is also where diversification enters the picture. Even if you don’t find other asset classes appealing, they can still help a lot to diversify.
Growth
As we have mentioned, different asset classes behave differently from each other. It goes without saying that each asset class has a distinct potential for growth.
For one, there are the so-called “value stocks,” which points to companies that have relatively lower share price compared to its balance sheet value, profit, or cash flow.
You can also gravitate towards “growth stocks,” or companies in the market that sport great chance for substantially quick growth or expansion.
Then, you can also choose capital preservation investments, which have the likes of bonds and some other cash products. These investments are largely designed or mainly function to help you keep up with inflation.
Market Capitalization
Finding its market capitalization is one effective way to measure the real size of the company.
The market capitalization of a company that’s publicly listed is normally determined by the value of the share price times the number of the business’s outstanding shares.
In general, large cap investments are more appealing to many investors. This is because they are perceived to be more stable. On the flip side, small cap investments are those that sport large potentials for larger, and maybe quicker, growth. There also exist mid cap assets, which brags stability and some potential for growth.
Sector and Industry
It’s also imperative to look into the sector and industry you’ll be investing in. Remember that the company isn’t an island, and it is constantly affected by various things inside and outside its management.
For example, if the tech sector is currently struggling or on a trough, the health products might be doing better. This is another reason why you should diversify or expose yourself to various assets and sectors and industry.
You should mix things up and refrain from sticking to only one kind of asset and industry or sector.