When investing it is common to allocate investments across several asset classes. These asset classes are typically stocks and bonds on one hand and cash or money market securities on the other. When one includes all assets, allocation often includes investments in a business and one’s home. Learning how to effectively allocate your assets is an essential step to balancing aggressive and safe investments. You will generally need to allocate your assets differently as you approach retirement.
What Are Asset Allocation Funds?
An asset allocation fund commonly mixes growth and income in the same fund. For example, an asset allocation mutual fund takes money from many investors and constructs investments with a stated goal for mixing equities and fixed income vehicles like treasuries or corporate bonds. Many who wish to invest their money for retirement do not have the skills, time, or inclination to construct such an investment portfolio. And, a fund with larger amounts of capital to invest can often put money to work in ways not available to a single investor.
What Is the Difference Between Asset Allocation and Diversification?
Asset allocation refers to choosing where to put your investments to work. Diversification refers to spreading out your investments across several types of investment categories. When one begins to invest, he or she can choose stocks, fix income securities, real estate, or even foreign investments. In choosing which categories for your money that is the act of allocation. If you have put all of your money in one stock or one type of interest-bearing vehicle you may want to diversify to gain access to more opportunities and limit your risk of one investment going bad and taking all of your wealth with it.
What Is the Difference Between Asset Allocation and Security Selection?
When you determine the mix of assets in which you will invest, that is asset allocation. For example, you may choose to invest in stocks and corporate bonds. Now you must pick the individual securities in which you will invest. That is security selection. When you allocate assets, you are generally choosing non related investments with an eye on both return and risk. When you have chosen how much of your money will go into stocks you may decide on an ETF that tracks the S&P 500, an individual stock like Microsoft, or a mix of small stocks with the potential for explosive growth.
How to Calculate Asset Allocation Attribution
How is your portfolio, or your managed allocation fund, performing? Attribution analysis looks at the value added to a set of investments by the allocation scheme used. It breaks that value into three parts. The value of asset allocation is found by comparing strategies such as under-weighing cash and over-weighing equities or vice versa. Stock selection is analyzed by comparing individual sectors within the overall portfolio. Interaction is the measure of how the portfolio performs aside from asset allocation and stock selection decisions. All of that having been said, an investor will generally look at yearly returns and compare them to a benchmark like the S&P 500 to make their decision.
What Is Global Asset Allocation?
The American stock market and American securities are not the only ways to invest. Many investors move their money into European, Asian, or other offshore investments when the US economy is in a downturn and growth is better elsewhere. Most investors do not invest through foreign exchanges but rather choose American Depositary Receipts which give them access to foreign markets and are available through a broker in the USA.
Which Is Not a Consideration When Allocating Assets and Diversifying?
Asset allocation and diversification generally refer to liquid investments like stocks and bonds and not real estate holdings. Thus, real estate is not a consideration when allocating assets and diversifying. You may choose real estate as part of your investment scheme but the parts that you can adjust and readjust to keep up with your changing requirements will be in your stock and bond portfolios. For example, you will commonly allocate more money into bonds as you approach retirement.
What Should My Asset Allocation Be in Retirement?
Asset allocation in one’s younger years should be toward growth of capital and in retirement it should be toward income. A typical allocation is forty to fifty percent of your portfolio in interest bearing vehicles in early retirement (sixty-five to seventy years of age). For retirees aged seventy to seventy-five the usual allocation is fifty to sixty percent in CDs, bonds or treasuries. When a person is over seventy-five years of age the usual suggested allocation is sixty to seventy percent of assets as interest bearing products.