Asset allocation refers to the distribution of investment assets across various asset classes, such as bonds, stocks, and real estate.
It involves three steps:
- Step 1: Defining individual parameters
- Investment amount: How much capital is available?
- Investment frequency: Should an existing lump sum be invested all at once, or should surplus income be invested regularly?
- Investment horizon: Is regular income needed, or is the main goal capital appreciation over a longer period? How long can the investment be locked in for?
- Risk tolerance: What level of risk is the investor willing to take? (Does security take precedence over returns, or do returns take precedence over security?)
- Tax situation: Can the investor take advantage of tax benefits?
- Step 2: Selecting the best possible investment alternatives
- How much capital should be invested in each type of investment?
- Where should purchases be made?
- Step 3: Monitoring performance
- At regular intervals, you should review whether the investments need to be rebalanced because investment goals have not been met or your personal situation has changed. When rebalancing, however, keep in mind that this usually involves costs (purchase and sale fees, taxes, etc.).