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Asset allocation

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Asset Allocation
In simple terms, asset allocation refers to the balance between growth-oriented and income-oriented investments in a portfolio. This allows the investor to take advantage of the risk/reward tradeoff and benefit from both growth and income. Here are the basic steps to asset allocation:

 

1.     Choosing which asset classes to include (stocks, bonds, money market, real estate, precious metals, etc.)

2.     Selecting the ideal percentage (the target) to allocate to each asset class

3.     Identifying an acceptable range within that target

4.     Diversifying within each asset class.

Risk Tolerance
The client's risk tolerance is the single most important factor in choosing an asset allocation. At times, there may be a distinct difference between the risk tolerance of a client and his/her spouse, so care must be taken to get agreement on how to proceed. Also, risk tolerance may change over time, so it's important to revisit the topic periodically. 

Time Horizon
Clearly, the time horizon for each of the client's goals will affect the asset allocation mix. Take the example of a client with a very aggressive risk tolerance. The recommended allocation to stocks will be much higher for the client's retirement portfolio than for the money being set aside for the college fund of the client's 13-year-old child.


 

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Asset allocation is one of the major concepts in finance. Apart that its significance in investments and fund management, It is also very important in any other business. Understanding and following this concept provides the best results for given operational plan

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