Planning your Investment
Asset Allocation: Get the First Step Right
The most important step in investing is to properly divide your assets among different types of investments. Different investments perform differently depending on economic conditions. So, the secret lies in keeping a good balance. This can sustain your portfolio in a wide range of market conditions. This way, asset allocation comes to be the most important form of diversification. Various asset classes like stocks, bonds, and cash are subject to varying levels of risk. Spreading out your investment options can be the solution.
Consider Investment Goals, Risks and Time
There are three important factors that you should consider while you chalk out your asset allocation plan.
- Investing goals
- Risk tolerance
- Time horizons
All three, closely related, decide how much money you will need to invest at certain points and how much uncertainty you can expect in varying market conditions. Investing goals depend on your age and family situations. The younger you are, the easier for you to tolerate more risks in your investments. You will have more time to make up for the losses. Time horizons are the periods of time before you start receiving your money. So your time horizon could be till your kid starts going to college or till the time you retire. You can opt for riskier investments in long time horizons because a temporary downturn will not spoil the long-term plan.
Determine Investment Options
Determine which investment options suit you best. Stocks show the best long-term growth prospects. But, stocks have their own share of risks. You should remember that often, individual stocks do not perform well and stocks perform better as a whole. So you can play safe by investing in bonds. Cash investments like money markets are the safest option, although they deliver the lowest returns. So you may wish to spread out your assets accordingly. You can also consider other options like real estate or international investments.