Welcome to the Investors Trading Academy talking glossary of financial terms and events.
Our word of the day is “Asset Allocation” In the most basic sense, asset allocation
is simply how one's assets are divided among different asset classes, such as cash, stocks,
bonds, real estate, and so on -- even insurance investments, commodities, collectibles, and
other categories count.
But the term also refers to an investment strategy -- one that can reduce risk through
diversification.
Clearly, having all your money in any one asset class can be risky.
In 2008, the S&P 500 plunged 37 percent.
If you'd held all your assets in an S&P 500 index fund, your net worth would have taken
a big hit that year.
Simply put, strategic asset allocation involves taking your money and dividing it up into
several pieces, which you then allocate across different types of assets.
Once you've decided on how much of your money will go into each broad asset category, you
then drill down and choose individual investments that fit into those categories.
The first step requires two decisions.
First, you need to decide what sorts of assets you want to include in your portfolio.
Traditionally, asset allocation strategies usually stuck with three major asset classes:
stocks, bonds, and cash.
But recently, the availability of alternative investment classes like real estate, commodities,
and specialized investments in private equity and hedge funds led to many investors broadening
their asset allocations to include more complex combinations of assets.
After you decide which assets to include, you must then choose how much of your money
to allocate to each asset class.