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Most financial analysts argue that asset allocation is a vital factor in determining the returns from an investment. Asset allocation refers to the application of an investment policy whose intention is to balance risks and rewards by modifying each asset in an investment portfolio, depending on factors such as the investor’s personal goals and risk-tolerance (Brunnermeier and Stefan 720). Several benefits come along with asset allocation, such as increasing returns from an investment.

Purpose of Asset Allocation

Asset allocation is based on the ground that different assets are more likely to perform differently in various economic conditions. Various assets performing differently in varying markets explain how diversification helps reduce risks for an investor. The purpose of asset allocation is, therefore, to balance the risks and rewards of investors through asset diversification. Through allocating investments in different financial instruments, investors can avoid total losses in cases when the investment does not work out. The level of diversification depends on the risk tolerance and personal goals of the investor. Investors are encouraged to invest in different enterprises with varying levels of risks. In this way, asset allocation fulfills its objective of establishing investment portfolios seeking to enable investors to attain their objectives with the standard of risk they feel comfortable.

Importance of Asset Allocation

Asset allocation helps improve the returns on investment. Through asset diversification, a key strategy used in asset allocation, investors’ risks are reduced (Guidolin and Allan 3510). Through risk reduction, investments can make more returns because losses are minimal. Studies have also shown that the asset allocation policy of a firm or an investor determines the returns they get in a great way. Additionally, it is proven that asset allocation contributes to the returns from an investment by 91%. Asset allocation plays a vital role in maintaining a good long-term performance. Many investors have faced the problem of making good returns in the short term that fade in the long run. With asset allocation, investors can come up with strategies to help them retain good performance even in the long term. Indeed, many successful investors have witnessed the importance of asset allocation in maintaining the high level of productivity during long period of time. Asset allocation also helps investors pull through unpredictable markets. Asset allocation looks into different measures to evaluate different markets. Through asset allocation, investors can determine the kind of markets to invest and how to weather in such markets.

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Reasons Why People Should Be Interested in Asset Allocation

Everyone in the investment business should want to venture in asset allocation. Asset allocation has helped investors make good returns for their investments (Brunnermeier and Stefan 720). Making high returns is every investor’s goal. Investors should realize that asset allocation and good returns move along. By realizing this, they will want to venture in asset allocation. People should also be interested in asset allocation to balance their risks and rewards. In particular, asset allocation enables investors to balance their risks and rewards, and at least these specialists should bear this in mind.

How to Do Asset Allocation Properly

Just doing asset allocation is different from doing asset allocation properly. Asset allocation produces perfect results when carried out in the right way. Assets involved in asset allocation include stock, bonds and cash. The three classes are divided into international securities, money market, fixed income securities, and small-cap stock among others. The main agenda of allocating assets is to reduce risks available so long as there is a certain expected level of return. For good yields, an investor requires gauging the risk-return standard of each asset in the market. Equities, for example, generate the highest returns and have the greatest risks, while treasury bills, on the other side, have the lowest returns and have most moderate risks (Guidolin and Allan 3511). The difference in risks and returns signifies that equities suit investors with high-risk tolerance and longer time to get back to normal after massive losses. Investors with low-risk tolerance should invest in low-risk investments like treasury bills. Investors who have long time horizons and substantial capital for investment should embark on investing in high risking investments like equities, while investors with short time horizons and little capital for investment should rely on small risking investments. There are different strategies to ensuring a perfect asset allocation program. Some of the strategies include strategic asset allocation, integrated asset allocation, tactical asset allocation and dynamic asset allocation (Guidolin and Allan 3515). Investors should consider these strategies when making the decision of how to allocate their portfolio. In the strategic asset allocation, investors should make investment combination based on the risks and returns associated with the assets. For example, if in the past bonds have been known to make 10% returns and bonds 5%, then a 50% combination of bonds and stock should bring 7.5% returns. Investors should evaluate some returns to expect by investing in a particular mix of assets. Dynamic asset strategy is another asset allocation strategy commonly used. This approach enables investors to keep changing the level of individual assets in a mix depending on the economy. Investors are encouraged to sell assets that are declining in returns and purchase those that are increasing in returns. The integrated asset allocation strategy involves considering the risk involved and the economic expectation of the investor. This plan means putting all aspects of the other plans in consideration. By applying these strategies appropriately, investors are can allocate their portfolio properly.

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Investors should conduct regular portfolio review after they have allocated the most appropriate investment strategy for their portfolio. With time the portfolio shifts from being moderately conservative to an equity-heavy portfolio. Investors should carry out rebalancing to get back the portfolio to its original state (Brunnermeier and Stefan 723). In this way, the investors sell assets that have increased substantially and use the capital gained to purchase assets that have declined. In this way, the investor can cope up with the changes in risks.

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Conclusion

Asset allocation is a very useful tool to ensuring good returns on investment. Investors should always rely on asset allocation because it helps them balance the risks and rewards of investing in an asset. Asset allocation also helps investors in a big way achieve their objectives with the level of risks that they feel comfortable. It is of very great importance to investors because it also helps them attain more consistent returns and assist them to remain focused on their goals of obtaining as much revenue as possible. Asset allocation should be carried out appropriately for the right results to be observed. Investors should invest in different assets depending on their risk tolerance and time horizon. Investors with high-risk tolerance should invest in highly risky assets such as equities which give high returns. Investors with little tolerance should invest in assets with low risks and low yields. In general, they should use the different strategies when allocating assets. Strategies such as strategic and integrated asset allocation strategies guide investors on the right combination of the asset to invest. Asset allocation is of a great importance, and all investors should ensure that they make good use of it.