Stocks, bonds, and cash are generally known types of assets. These are the type of assets that investors would usually choose from when they invest for retirement or a college savings plan. Some investors may add other types of assets in their like gold or other precious metals, real estate, and other commodities.
Investing in different type of assets will also have various level of risks so prior you make a choice of any investment, you need to research well and understand the uncertainty of the investments. It is nice to think of the profits that you'll be making out from your investments but you also need to consider the risks involved. Weigh it appropriately how much money you can afford to lose from your capital investment.
A lot of investors use asset allocation as a technique to diversify the various types of their investment assets. On the other hand, some investors purposely don't use asset allocation method because of certain reasons. For example, if you are an investor who wants to save for a down payment on a house for your family then investing completely in cash equivalents like in savings deposits, certificates of deposit or money market funds could be a good choice for you.
- Moderately Challenging
Know your investment choices prior to investing in a mix of stocks, bonds, and cash. Study the typical feature or trait of these three major types of assets. Bonds are usually less volatile than stocks but give more modest returns.
The reduced risk of holding bonds compared to stocks would draw more attention to investors regardless of their lower potential for growth. Although there are also types of bonds that provide high returns very much alike to stocks but these bonds, aka as high-yield bonds (junk), could also bring higher risks.
Stocks have been recorded to have the highest risk as well as the highest returns among the three major types of assets. For those investors who have enough capital to use for their investments, they usually pick more stocks because they offer the greatest potential for growth in terms of profit.
Many investors buy stocks in the long term because the volatility of stocks makes them a very risky investment in shorter terms. Cash and cash equivalents like savings deposits, money market funds treasury bills, certificates of deposit and money market deposit accounts could be the safest financial investments, but they provide the lowest return of the three major type of assets.
The government assures many investments in cash equivalents. Inflation risk is usually the major concern for investors investing in cash equivalents. They worry about the risk that inflation will bring by leaving behind and grinding down investment returns over time although the possibility of losing money in cash equivalents are usually very low.
Calculate and decide the amount of money in investments that you presently have to diversify. You also need to check and find out the amount of money that you'll continuously add to your investment portfolio.
By including the three types of assets with their diversified investment returns that move up and down under various market conditions within your portfolio, you could protect your investments against substantial losses. Based on financial records of the past, the returns of these three major types of assets have not moved up and down at the same time.
Unpredictable market conditions that cause one asset, for example, like stocks to do well may often cause another asset such as bonds to have average or poor returns. So by investing in more than one type of asset, an investor could also decrease his or her risk of losing money because if one type of asset investment return goes down, he or she will be in a better position to counteract the losses with good investment returns in another type of asset.
Weigh the risks against the rewards in your investments. Take note that investments carry with them a certain amount of risk so understand very well before you buy and invest in any type of asset because in this kind of business, you'll either gain or lose some or even all of your investment money.
To some investors, the reward for carrying a higher risk is also the possibility for a greater investment return. Investors who have a strong financial goal with a long time horizon may usually make more money by investing in assets with greater risks, like stocks or bonds. They don't generally limit their investments to assets with lesser risks similar to cash equivalents.
Take a risk tolerance test. Checking the level of your risk tolerance as an investor is important because this is your personal capacity to bear and endure both positive and negative changes in the value of the investments in your business portfolio.
Risk tolerance is your strength, capability and willingness to lose some or all of your original investments in exchange for a larger possible amount of returns. An investor with a high-risk tolerance, is more likely to risk losing money in order to gain a bigger profit while an investor with a low-risk tolerance, tends to choose investments that could protect and preserve his or her original investment.
Consider your age in understanding your time horizon and risk tolerance. Some of the young investors may have more time to recover on their loses so they try to invest more while at the same time, they constantly learn additional information about investing.
On the other hand, older investors that have some investing experience may be more comfortable in the profits that they had earned and will take lesser risks with their financial investments although some will do the opposite. If you are concerned on how to create an investor's asset allocation plan, there are books, ebooks, websites on investing that offers information that can help you decide for your financial goals.
Use an asset allocation plan that is right for you which includes the way on how to properly divide your investment portfolio among various types of assets like bonds, stocks and cash. The method of selecting and combining assets to hold in your investment portfolio is truly personal so choose an asset allocation that works best for you. Always consider important aspects and situations in your life that you need to adjust in the future since it will also affect your time horizon as well as your ability to handle investment risks.
Analyze and audit annually the asset allocation in your investment portfolio which was diversified so that you will know the stability of your present asset allocation. By checking your financial asset allocation every year, you'll learn how much money is remaining in your account.
This is a good thing to do so that you can also adjust to your financial needs every year based on the changes of the situation changes including your time horizon. This is generally the most common intention for changing an investor's asset allocation. For example, investors who get closer to their retirement age and investment goals will probably change their asset allocation by investing more for retirement.
These investors may hold less of their stocks and more bonds especially cash equivalents. There are other reasons why investors may need to change their asset allocation and some of the reasons could include a change in their financial situation or risk tolerance.
Tips & Warnings
If you are a new investor, you may have known some of the basic principles of responsible and logical investing. You may have acquired your knowledge through your experiences in life that have nothing to do with any investment found in the market.
Asset allocation is important in some ways because it has major effect on whether you'll achieve your financial goal. So adding adequate risk in your portfolio could make you earn a large return to achieve your investment goal.
You need to discover and find out the most suitable asset allocation for you since this is the most important decision that you'll make regarding to your investments. Some investors may also want to consider referring a financial professional to help them decide on how to initially create an asset allocation and give advice about investment adjustments in the future.
Avoid hiring anyone to help you allocate your financial assets unless you are absolutely sure that this person is reliable and trustworthy based on your thorough inquiry, inspection and analysis of his or her credentials and records including disciplinary history.