Every asset class in an investment portfolio is known to entail its own risk and return factors, which makes it follow a distinct behavior over time. Asset allocation refers to the technique of balancing the inherent risk in investment classes by allocating your money to various asset categories in order to earn the highest possible return. Richard Cayne Meyer explains that while there is no single formula that can help an individual optimize his/her portfolio, there are a few guidelines that can be followed in order to make the maximum off your investments.
At the very core of asset allocation lays the risk-return tradeoff. Richard Cayne Meyer mentions that while everyone would wish for a portfolio that earns them the maximum returns, it does not come without an exceptional amount of risk. For instance, if someone chooses to invest solely in stocks due to their potential for high returns, in times of a global economic crisis such as that of 2007-2009, they will not only be set to lose their returns, but also part with their initial investment, making it a less than ideal situation. Richard Cayne Meyer suggests that though those with a higher risk appetite should invest in stocks, others, who need security of investment, should look to diversify into bonds, mutual funds, etc.
Richard Cayne Meyer mentions that keeping your long term as well as short term goals clear is one of the best ways to figure out which asset class would work for you. For instance, if you are looking at a retirement fund that helps you build your long term nest egg, then short term market fluctuations should not be a worrying factor; however, you would need a fixed-income or more of a certain stable plan in case you are saving up for a college fund for your children.
With a plethora of financial software and basic investment plans doing the rounds on the internet, Richard Cayne Meyer advises that one should exercise caution when referring to the same. While it may be a good idea to look at such plans as a starting point; however, since most of these plans and software do not accommodate for individual needs and situations, you cannot opt to follow them without the help of a professional or rational advisor.
Last, though not the least, factoring time into your asset allocation plan is the best line of action. Richard Cayne Meyer advises, “the earlier you start, the better off you are”. Most market research suggests that every delay of 10 years will triple the amount of savings/returns you would require each month in order to accomplish your long term goals, which can turn into a major burden that may push you into making unwise decisions. Start early and diversify and of course says Richard Cayne at Meyer, save as much as you can when you can.