Asset Allocation

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Asset Allocation
"In a perfect world we don't want to be overly dependent on any single asset or be so dependent on the cycle or where one asset is the bulk of this company." -James Packer

Asset allocation is an investment strategy which helps investors create balance and variety in their investment portfolios. Asset allocation and diversification are often used interchangeable however, they are two separate techniques. Diversification refers to dividing investments up into different industries and sectors. Asset allocation refers to the process of dividing assets up into major categories like stocks, bonds, cash, and real estate. This is important because each type of investment has its own rate of return and its own risk. Each will behave differently and be influenced by different economic factors. A solid investment plan will use both diversification and asset allocation to create a productive and fruitful investing environment. Determining and customizing your investment plan with the right mix of stock vehicles is the most important decision you will make as an investor.

Where to Begin? The first step is to figure out in what proportion will each of the investments types exist in your financial plan. Most financial advisors agree that at least 40% of your portfolio should be investments in stocks. While 20% should be in long term investments like mutual funds and bonds. The other 40% should be invested in high yield stocks which have higher risk and therefore the potential for higher profit.

However, risk levels are different for each individual investor and should be researched fully before making a decision. The specific industry of the stocks or bonds you are invested in is actually less important then the way you have your investment types divided up in low to high risks options, long or short term bonds, or the amount of available cash.

Asset allocation is extremely specific to the individual. While asking for advice from family and friends is a good place to begin your research about asset allocation never assume that your friend's asset allocation plan would work for you. Unfortunately, there is no simple equation which can determine what type of allocation is best for you or your risk level. A financial or investment advisor will be able to lead you through the decision making process.

Asset allocation can be a fun and exciting part of your planning process, so enjoy it! Make sure you to take the time to do plenty of research and reflect on what is best for you. Another factor which can influence your asset allocation is your short and long term goals. For example, if you are saving for retirement and can afford to place money into funds, which have less liquidity, then it is probably a good idea to invest more into mutual funds and bonds. However, if you have capital to invest now but in 1 year you will need for a down payment on a house, publicly traded stocks are a better option because they offer more liquidity.

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Financial Advisors

"Unless you have a definite, precise, clearly set goals, you are not going to realize the maximum potential that lies within you." - Zig Ziglar

It is extremely trendy in today's financial market to hire a "fee only" financial advisor. This a great alternative for investors who want to invest on their own but need advice from time to time. This type of advisor is paid by the hour or a lump sum fee and not by commission resulting from the buying and selling of stocks.

An investor benefits from this type of arrangement in many ways. You do not have to question the motives of "fee only" financial advisor because he is not going to get paid anymore for suggesting you buy or sell stock. Their services usually include reviewing or creating investment portfolios. Many financial advisors are also educated in a number of different areas including real estate, higher education financing, retirement, and taxes.

Most investors do not realize that the majority of brokerages and financial advisors do not provide their services for free. Often payment details are never discussed until after stocks are bought and sold. The investor assumes that their advice is free. Their fees come right out of your account. Commission based advisors receive large chunks of what you are investing sometimes close to 5%. When hiring a "fee only" advisor you know his hourly rate right up front, and he gets paid only for the amount of time he puts into working for you.

The reason why "fee only" financial investors are so popular is because they offer the best of both worlds. They allow the financial planner make money while still being able to do what is right for their client. Investors can have more confidence in this type of advisor because their paid is a set fee and there will be no pressure to sell or buy stocks. Remember, commission based advisors get paid no matter what. If you are losing money in the stock market, they are still making money from you buying and selling stock.

If the majority of your investments are long term and you do not foresee buying or selling stock regularly then a commission based financial advisor might work well for you. However, if you work for a company that offers 401k's, they will often have a financial consultant which will work with you for free. They are being paid by the company to field questions about investments and the stock market. Take advantage of the benefits your job offers and consult a financial advisor, today, with all of your investment questions.




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Asset Allocation
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