asset allocation

Asset Allocation – Understand How To Spread Your Wealth Into The Different Asset Classes

Many of the wealthiest people in the world owe their fortunes to different types of residual income – from stocks and bonds to investment trusts, real estate, commodities and more. In this chapter we’re going to discuss the importance of asset allocation – how you spread your assets into different types of products (from safe to speculative).

When we talk about asset allocation we refer to the various vehicles in which we invest our cash. We can split our assets into three specific classes – security, buy/hold and speculative. It is advised that the largest chunk of your assets should fall into the security (approx 70%) bucket and this includes assets such as cash, ISAs, pension funds, home of residence, safe bonds and government securities. These are the safest of assets.

The next type of asset class is the “buy & hold” variety – these tend to be longer term investments that are generally safe. Assets in this class include buy & hold stocks/mutual funds and investment real estate. This type of asset is generally solid with the stocks being of high pedigree with sound fundamentals that promise much for the future. The buy & hold chunk of your total assets should include approximately 15% of your entire assets.

Finally, we come to the speculative class of assets – these are higher risk products that you jump in and out of quickly for short term financial gains. These include stocks that you trade actively (jumping in and out within a few days/weeks), IPOs, options & futures, warrants and some of the more speculative mutual funds.

Before you decide to enter into stock investment it is worth drawing up a plan so that you can set your own rules about your asset allocation (and discover where you are right now). Ultimately, The 70/15/15 rule to asset allocation will depend upon the individual investor, their risk tolerance and their mindset. You can adjust the numbers to more closely match your attitude towards risk.

Many experts believe that the asset allocation proportions should vary according to the investors age. For example those aged 40 or below may wish to employ a more aggressive strategy where only 40% of assets are in security and 30% are held each in buy/hold and speculative investments. Again, your personal circumstances, preference to risk and other influencing factors should be considered before arriving at your personal asset allocation numbers.

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