What is meant by Asset Allocation?
An investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon. .Asset allocation is about diversifying your investments across different asset classes so that you can optimise the risk return balance of your portfolio. It ensures that the poor performance of any one asset will not collapse your entire investment plan.
The three main asset classes – equities, fixed-income, and cash and equivalents – have different levels of risk and return, so each will behave differently over timeStocks, Bonds and Cash are the most common asset classes. Each of them have different qualities and strengths, as well as risk / reward characteristics.
Stocks – Highest Risk – Return Potential
Stock investment can earn and lose money based on the increasing or decreasing market value of the share. The price movement of stocks are very drastic, which can make or lose money very fast. Hence it is the most riskiest one.
Bonds – Low Risk – Return potential
Bonds or fixed income investments are money loaned to the government, municipalities or other entities). They can earn money from the interest paid on that loan. Since the money is borrowed by government authorities the investment risk is very less.
Cash – Lowest Risk – Return potential
Cash or Cash equivalents are Treasury bills, certificates of deposits and other short term securities. They earn you money through interest, which is usually set at a guarantee rate.