Asset allocation is the process of distributing your money between various assets such as stocks, bonds, and cash. It is an important aspect of Financial Planning. The decision to allocate assets is a personal one. The optimum asset allocation for you changes over time, based on how long you have to invest or how that asset class is performing or what is your age and how much risk you are willing to take.
4 Factors to take into consideration while Investing:
Time Horizon – The number of months, years, or decades you need to invest to reach your financial goal is your time horizon. Longer-term investors may feel more comfortable taking on riskier or more variable investments. Those with a limited time frame may want to take fewer risks.
Risk Tolerance – Your ability and readiness to lose some or all of your initial investment in exchange for potentially higher returns is known as risk tolerance.
Age – Age is one of the main factors when deciding where to invest and how much to invest. As a thumb rule in investing suggests that a person should invest an amount in equity that is suggestible by the rule 100 – Your age = The percentage of equity exposure, you should have.
So, by this rule, you can deduct that how much percentage you need to invest into equity. For Example. Let’s say your age is 25. When we apply the rule we get, 100 – 25 = 75; This means that as 25 years old you should invest 75% of your capital into equities.
A young investor is often viewed as a risk-taker because they are in the early stages of their career and can handle volatility/deviation in funds. A person in his/her early 40s or 50s, on the other hand, cannot afford it since they are likely to have a family or need to deposit their money somewhere safe so that they can turn to it in times of need.
Although, the scenario can vary from person to person. The summary of this point is to state that, if you are a Risk-Taker and you are ready to face the sea of emotions and volatility, then you should invest 75% (According to Example) of money in Stocks and the rest of 25% in Debt/Gold/Bonds and so on.
Performance of Asset – While Making decisions for Asset Allocation, considering the performance of current asset allocation is essential. Let’s say you are invested a lot in stocks and now the Stock Markets are correcting. If you cannot take the risk of facing a loss or if you can’t face the volatility then It’s better to park your money somewhere safe like Gold. As it’s well-known that gold is inversely proportioned to the stock markets and is considered a safe investment.
Folks, this is all for this episode of FinCon with Omega. Stay Tuned for more!
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