The stock market is unpredictable. It rises. It falls. It does both in the same day. When your hard-earned money is changing in value drastically, it can be nerve-wracking. Asset allocation allows you to spread your risk across different investments so that your money grows with the least risk possible.
What Is Asset Allocation?
Asset allocation is putting your money into various industries to maintain a positive trend in your portfolio if any one industry suffers extreme losses. You want to spread your investments over diverse asset classes as well to reduce the overall risk of your portfolio. To be done correctly, asset allocation requires knowledge of how industries are connected to each other. You may want to consider talking to a professional who specializes in financial planning for professional athletes.
How Should You Allocate Your Portfolio?
The most basic part of asset allocation is dividing your investments between stocks, bonds, and cash. The percentage of each type of investment changes with age. This is because stocks are considered a high-risk investment that have the potential to lose all value. As you age and have less time to recover your losses, your portfolio should change to be less risk tolerant and include more fixed-income assets such as bonds. A moderately aggressive asset allocation would invest 50% in stocks, 40% in bonds, and 10% in cash.
How Should You Allocate Your Stocks?
Asset allocation shouldn’t end with your investment types. Since stocks can make up half or more of your investment portfolio, it is important to make sure your stock investments are diverse. This can be done simply by investing in exchange traded funds. ETFs group many stocks together, giving you instant diversification. Research each ETF that you plan to invest in to avoid purchasing ETFs that contain the same stocks. Experts recommend that no one stock exceeds 15% of your portfolio value.
How Often Should You Reallocate?
The market is constantly changing in value. If one industry has a particularly good year, the money it generates for your portfolio could throw your asset allocation off balance. Proper portfolio management means you should reallocate at least once a year to maintain your desired ratios.
Protecting your nest egg through asset allocation doesn’t have to be complicated. By putting your money in many baskets, you reduce the risk of derailing your retirement plans if one type of asset is underperforming. Asset allocation allows you to always have investments that are profitable so you can sell high and buy low, maximizing your investments.