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Let’s think about assets

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The beauty of asset allocation

Asset allocation is basically how your assets are invested. About 90 per cent of portfolio volatility occurs due to the strategic allocation of your assets according to studies.

Sadly, most investors either lose control of their asset allocation through an overabundance of mutual funds, or they pay too much attention to the selection of their securities and market timing. While all aspects of investing are important, good asset allocation will help you sleep at night.

A careful combination of assets

Different assets will have different reactions to economic conditions. At different points in time, different assets will perform.

Equities, bonds and cash when invested prudently help soothe the impact of market volatility. An investor must determine what range of returns he or she is comfortable with. Speaking to an advisor can help you determine the asset mix for your individual investment goals.

The sound principle of rebalancing your asset mix

As all investors learn, over time investments perform differently. Those that grow quickly will soon be a greater percentage of your portfolio than originally invested.

If your objectives and tolerance for risk haven’t changed, your asset mix could become inappropriate. Your asset mix could prevent your achieving your long-term financial plan. For example, as your life changes, you may be more aggressive or more conservative as an investor; correspondingly, your asset mix should meet these important life events.

Having children is an event that might cause you to rethink your portfolio.

Rebalancing explained

Since managing risk is so important to investors, investors need to stick to their plan. Good diversification maintains a portfolio’s ability to grow, as well as an investor’s calm in the face of scary market events. Unfortunately, investors who are not privy to sage advice will often react hastily in the face of turbulent markets.

You should review, and when needed, rebalance your portfolio, either annually, or bi-annually, whichever is most suitable to each individual investor’s situation. Another possibility, in the face of wildly gyrating markets is to rebalance if any one asset moves notably from your set target.

A good rule of thumb to avoid an asset group’s drifting too far is to rejig one’s allocation if part of your portfolio has moved 5 – 10 per cent or more. While this can act as a target, many investors will reallocate using different metrics. What’s important is choosing a realizable goal, sticking to it, and making it work.

The secret is automating the process. When you make asset allocation automatic upon reaching a target, you take emotion out of the equation. And that’s exactly what you want to do. You may give up some gains in a rising market, but you’ll also give up catastrophic losses in a serious down market.

Preserving capital goes a long way toward realizing your portfolio goals.

An effective way to rebalance your investment portfolio is to sell some of an asset that has done well and reinvest your profits in investments that have lagged. As a result, if your equity component was 50 per cent and it increases to become 60 per cent, it may be wise to return it to its original amount and invest the rest in the fixed income component.

An advisor will definitely be helpful in aiding you in your goal of rebalancing your portfolio in an effectual manner.

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