No matter how new you are to the world of investment, you must be aware of the basic fundamental principles of sound investing.
How does one learn these basic fundamental principles? With trial and error experience that has absolutely nothing to do with the stock market.
Asset Allocation consists of investment portfolio amongst other assets like cash, bond and stocks. However, it is your personal choice to decide which mix of an asset will hold your portfolio.
Your capacity to tolerate tasks under pressure and time management will decide which asset allocation is meant for you.
• Time Management
Time management is basically the number of months, years or decades one needs to invest to achieve your financial target. If there is an investor in you, a longer time horizon with a risk factor i.e. more volatile, will not bother you as you can wait for the slow economic cycle and can endure unavoidable changes of the market. In contrast, someone investing for their child to go for a lesser risky investment because he/she has a shorter time in hand.
• Risk Taker
It is a risk taker's ability and willingness to either lose some or gain some or lose all original investments in exchange for a better potential profit. Someone with an aggressive investment habit, or a proper risk-taker who does not mind losing all to gain the ultimate target has higher risk tolerance.
Some who is conservative when it comes to taking a chance with risk tends to tilt towards investments that favour your original profit more than the risk.
• Risk vs Reward
In terms of investment, risk and reward is an unavoidable concept and is intermingled. The phrase, 'no pain, no gain' closely sums up the meaning of risk and reward.
Every investment style always has some degree of risk in it. It is best to understand concepts like the stock market, bonds and mutual funds before taking a risk.
Anyway, there is always a reward waiting at the end of a risky tunnel. If your goal in finance is a long term then you stand a better chance at making more and more money with time.
On the contrary, it is better to invest in cash only if you plan for short-term financial goals.
• Your choice of investment
Always try to keep a background check regarding new investment products that include stock and SMF (Stock Mutual Funds), bond mutual funds, lifecycle funds, money market funds etc.
Let us go deeper into the 3 major assets of allocation
It has the popular vote for its highest amount of risk and greatest returns in the history of investment. It is known as the 'heavy hitter' which offers so much potential for growth each year. Even in a scenario of loss, investors never back off from their willingness to invest in stocks and get back positive returns.
They are considered less volatile than stocks and are pretty modest in terms of receiving rewards.
An investor is likely to multiply their bond holding vis-à-vis to their stock holding. However, certain categories do offer attractive bonds with higher returns similar to stock, but they yield more junk.
Savings, treasury, money market funds, deposits have been declared as the safest investments, but offer low returns amongst all the 3 major assets.
You are less likely to lose money in this asset.
People invest in cash equivalents because it has an inflation risk.
Stocks, bonds and cash- these are the most common asset categories. As a beginner, you are likely to choose from these 3 assets to make an investment. There are other categories of assets as well, like, precious metals, real estate, private equity etc- these contain category-specific risks for the investors.
Always keep in mind that before making an investment, always study the risk factors thoroughly so that you may understand what is asset allocation and how appropriate it is for you to invest in it.