Do you understand that minimizing your portfolio risk is the very key to achieving stable returns? I guess you do. But then you should just stick with Bonds, No? Well, why would anyone want to stay fully invested in bonds where the returns are almost negligible, rather negative if you consider inflation rates?
So, let’s come to the point on how you can improve your portfolio returns and cut down considerable amount of risk exposure in the process. In this post you can find ideal asset allocation ratios for both aggressive as well as conservative investors. These ratios have been derived while considering the current rock-bottom interest rates scenario and the risk of a double-dip recession, which could be well followed by a prolonged bear phase in stock markets over the next decade.
Asset allocation is simply diversifying your investment portfolio across asset classes popularly bonds, real estate, commodities, you may include art, and then there are domestic as well as international equities.
A newbie might wonder what’s the fun behind all this diversification?
Well, the key purpose is to bring down your risk exposure as a particular asset class might perform poorly for certain time frame when investor interest dries out for some reason. As you should know there are various asset classes that move inversely to each other, so this particular behavior helps in bringing down your risk exposure through optimal asset allocation.
How to choose which are the best asset classes to invest in?
Well, this one is a bit tricky to answer on a broader perspective as risk tolerance levels vary with investment needs. However, one can consider those assets where they find a favorable mix of these factors.
Considering the current interest scenario it’s hard to find safe investments that can generate substantial returns, so these are the times when investors are increasingly relying on stock investments for keeping afloat and to beat inflation.
Stock market investments seem tempting when you look at kind of returns they can generate, but this comes with the real risk of losing money. Its not easy to make returns in equities, you need to be a sound investor first. Wrong timing, poor stock selection, and a weak heart are few things that can make you suffer to such an extent that you may eventually decide to take out whatever is left on the table.
However, if you do your homework well and start investing long term on fundamental grounds, you will eventually win over the heartless markets.
Finally, here are the asset allocation ratios that are likely to generate better returns in the next decade, but you should alter these as per your investment objectives.
Aggressive portfolio allocation ratios for Investors chasing growth:
Stocks / Mutual Funds / ETFs 60%
Liquid funds 20%
Conservative portfolio allocation ratios for Investors who seek stability:
Liquid funds 30%
Stocks / Mutual Funds / ETFs 20%
I am suggesting these asset allocation ratios considering the current unemployment scenario. Nowadays, the risk of losing a job is way too higher than it was few years back, and the worst part is that finding another job takes much longer. At the same time, cost of living is increasing at a faster pace and the returns on investments are inching lower.
So, in such conditions you need to keep higher percentage of your investments as liquid funds as doing so will ensure that you do not fiddle with your long term investments in stocks and bonds.
A final word on asset allocation would be that you don’t take your initial allocation for granted. Your portfolio should be reviewed at least once every year.
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