Your ideal portfolio is a variety of investments from the most risky to the most secure that you will need to get the total return over the period that you require. Stocks, bonds, and money or cash market instruments are also taken to make the mix. The amount you allocate for each depends on the time horizon you have and how much risk you can afford to take. Diversification is a method of reducing your risk along with the great chance of earning higher returns since you are investing your money in various types of investments. Here we are going to talk about asset allocation, types of portfolios including moderately aggressive portfolios and the strategies to adopt for investing with maximum returns.
What Is Asset Allocation?
Asset allocation is an investment strategy according to which investments are divided across various types of assets such as equities, fixed-income securities, and cash and/or cash-equivalent securities.
Within these three classes there are subclasses:
- Large-cap stocks: Equity of companies that have a value of its stake in the public market above $10 billion.
- Mid-cap stocks: Stocks that are offered by firms with market capitalization ranging from $2 billion up to $10 billion.
- Small-cap stocks: Companies whose market capitalization is below $2 billion. Because they are less liquid, these equities are usually associated with relatively higher risk.
- International securities: This is any security that is floated by an international organisation and is traded on a foreign market.
- Emerging markets: Shares in organisations located in emerging markets. These investments involve a relatively high return and are, therefore, risky because they are subject to country risk and because they are less liquid.
- Fixed-income securities: US treasury or other highly ranked corporate or government securities that pay a fixed amount of interest, either on a regular basis or on the bond’s due date and repay the face amount upon the bond’s maturity. These are less risky compared to shares and there is less fluctuation in their prices.
- Money market: Short-term securities which are commonly maturing within a period of one year or less. The most frequently used form of money market investment is the treasury bills (T-bills).
- Real estate investment trusts (REITs): Shares in a pool of mortgages or properties owned by different investors.
Maximising Return and Risk
The objective of asset allocation is getting the best of both worlds, avoiding risks while getting the amount of return you desire. To that end, it is important that you understand the risk/return profile of different types of assets – asset classes.
Risk-Return Tradeoff:
- Equities: Equity investments are the most risky but also have the highest returns.
- Treasury bills: The risk on treasury bills is very low because they are US government securities, but the return on these instruments is also the lowest.
It is for this reason that high-risk choices should be implemented where the investors have high-risk tolerance levels. That is, they can agree to large fluctuations in prices prevailing in the markets. Thus, a young investor with a long-term investment account is likely to get back what he lost in the near future. However, an old, aged person who is about to or has already retired may not wish to risk their acquired fortune.
The general guideline is that after a few years, one should gradually decrease the risk in his/her investments so that he/she can retire with some decent lump sum invested in safer securities.
Deciding What’s Right for You
Due to the variations in return and risk, the investors should consider risk tolerance, investment goals and time frame, and the amount of money that needs to be invested as the foundation of asset allocation.
Types of Portfolios:
- Conservative Portfolio:
Conservative portfolios aim at minimising the risk of the principal and hence the majority of the investment is made in fixed-income and money market securities. A small exposure in stocks could go a long way in fighting inflation usually via investments in blue chips or index stocks.
- Moderately Conservative Portfolio:
These portfolios are meant to maintain the value of the portfolio while targeting some risks that will protect against inflation. They usually consist of high-yielding dividend stocks or bonds or any other investment that promises regular income.
- Moderately Aggressive Portfolio:
A moderately aggressive portfolio, sometimes called a balanced portfolio, distributes investments roughly equally between stocks and bonds. It is a balanced growth and income strategy appropriate for long-term investment that the investor can afford to take moderate risks. This is where the term moderately aggressive portfolio is very important because it gives the impression that the investments are balanced.
- Aggressive Portfolio:
Specifically, the most dominant component of aggressive portfolios is equities so these portfolios are relatively more risky. The objective is capital appreciation in the long run. Thus, to diversify, investors are likely to include some fixed-income securities in their portfolios.
- Very Aggressive Portfolio:
These portfolios are mainly composed of stocks, with the goal of reaching for high capital appreciation within the conceptual long-term investment period. They contain a considerable measure of risk and may exhibit short-term volatility.
Tailor Your Allocations
Model portfolios are ideal, but you should customise them according to your requirements. For instance, if you like to focus on researching companies, you may further subdivide the equities portion into individual types of stock.
The percentage of cash and money market investment depends on the organisation’s ability or willingness to take risks and the amount of liquidity required. It means that investors who require constant liquidity for their investments, or those who wish to preserve the value of their portfolio, will invest more in these tools. On the other hand, people willing to take more risks might invest less in such areas.
Maintaining Your Portfolio
It is important to perform your portfolio review at least once in a while. It is also important for one to realise that a change in lifestyle or needs of a financial kind may require a change of this mix. Thus, even with unchanged priorities, positive results in certain fields may need to be corrected to achieve the required level of risk.
Conclusion
Asset allocation is the process of diversification of investors’ portfolios by investing in various asset classes with the propensity to yield high returns and less risk. Different strategies, of course, fit different risk tolerances, time horizons, and objectives. Portfolio reviewing and rebalancing help one to realise investment goals and objectives and to ensure one is on track with the right strategy of moderately aggressive portfolios.
By studying these principles, you can ensure that the portfolio you created will contain securities and stocks in accordance with your preferred risk/reward ratio, meaning it will be either conservative or moderately aggressive. Those who are interested in more complex strategies Wright Research will provide the best investment solutions in India for account management. Accept these modern techniques of proposals and make the best investment for your bright financial future. Wright Research will rebalance your portfolio from time to time so that you can get the best out of it concerning asset allocation.
