When dealing with investments, it's vital to understand the various asset classes and how to allocate available resources to each. The principle of asset allocation exists to help investors reduce the risk of their investments, since each asset class reacts differently to different market situations.
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What is
Asset Allocation?
The amount of an investor’s
resources placed in a
particular asset class is guided
by an allocation model, with
each model driven by a
specific objective.
W
hen dealing with investments,
it's vital to understand the
various asset classes and how
to allocate available resources
to each. The principle of asset allocation exists to
help investors reduce the risk of their investments,
since each asset class reacts differently to different
market situations. For example, when stock prices
increase, bonds tend to decrease.
3. 3
The amount of an investor’s resources
placed in a particular asset class is guided
by an allocation model, with each model
driven by a specific objective.
Capital Preservation
Preserving capital is a motivation for
investors who wish to retain the principal
value of their investments and expect to use
it within a short period of time. An individual
planning to purchase a house, for example,
will not risk losing even a small percentage
of their investment.
Income Generation
Investors with income generation in mind
are those seeking to have their investments
earn a profit for them. A typical investor with
such an objective is an individual nearing
retirement who wishes to have a steady
income over a long period of time.
Growth Purposes
An asset allocation model with growth as its
objective is designed for investors looking to
build wealth in the long-term. Typically, the
investor has another source of income, so
they have the freedom to focus on growing
their investment portfolio.
4. To learn more about
this topic, visit the
blog of Kevin Neal.