Why Asset Allocation Is Required?

When forming a football team the manager sees that there is a captain, 2 forward hitters, 3 defenders and a strong goalkeeper so that the football team can beat any other team and can stay strong against all teams. Like wise it is important to diversify your portfolio and understand why the diversification is needed. There will be days when some of your stocks may decline but you will have other stocks that will make up for the loss.
 
One method of diversification is asset allocation. By having stocks, cash, real estate, ETF’s, mutual funds, bonds etc in your portfolio you can protect your portfolio and your investments. Normally when stock prices fall, bond prices will see an increase as investors see this as a safe option and so if you have a portfolio which includes stocks and bonds it will be less risky than stocks alone and this option is considered safe in volatile market conditions.
 
You should also diversify within the asset classes so as to be safe from devastations. In 2000 all investors who had only invested in tech stocks lost a huge sum when the dot.com bubble burst and technology shares fell to rock bottom. Similarly financial stocks took a beating do to the mortgage crises in the US 2007-2008. So it is essential that you do not heap up all your eggs in a single basket.  Mutual funds are also a great option as the fund managers diversify the portfolio and so risks are less.­­
 
There are many online sites which can help you determine the right funds to choose from. Google finance and yahoo finance are trustworthy sites that do offer a lot of financial advice and data of various companies across the world. There are a lot of books available online that can help you to diversify your asset allocation. You can even consider the overseas markets if you have sufficient capital and the stocks seem appealing. But do a careful study of the country and the company’s financial stability too.
 
There are a lot of suggestions and advice available but you should act on your rational thinking. Experience will go a long way in helping you decide the right options.. Don’t be scared of losses as losses are inevitable. The stock market is volatile and be cautious while trading. Remember that the football team that has the best players in all fields of the game turns out to be the most successful one, and a portfolio which has the best stocks in the market will emerge the winner.
 

By: Lavanay Bhadwal

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