Your savings are perhaps one of your most valuable assets. After all, a healthy portfolio demands sacrifices and tough decisions on your part. However, savings alone cannot make you wealthy. You need to invest them to get strong returns and grow your assets over time.
It is understandable if you do not know which investment instruments are the best. After all, there are so many in the market like stocks, bonds and mutual funds that selecting one may become a challenge. In light of this, some of you may think of completing avoiding it. This action on your part may leave you with less in the long term and even impact your retirement fund.
A better alternative is to opt for asset allocation which is a healthy mix of investment options to get the optimum returns.
What is asset allocation?
Different asset classes like real estate, stocks, bonds, mutual funds, etc. have a different level of risk and returns associated with them. While one asset class may be growing by leaps and bounds, the other asset class may be stagnant at a given point in time. For instance, the real estate may be booming but the stocks may be crashing down over high oil prices.
The idea is to spread your money across different asset classes so that you can reduce your risks. Puttin all your money into one asset class may expose you to dangerous levels of risks.
Here are a few things you may want to know about asset allocation.
Risks and Returns
This is perhaps the most important consideration during asset allocation. Most of you would want to put your money into an asset class with the highest possibility of returns. Needless to say, stocks can give you the most returns. However, they are also the riskiest proposition. Markets are unpredictable and you never know when they may plummet. The money you put into the stock market depends upon your risk tolerance. If you can afford to hold your money despite the changes in the stock market, you can put a decent amount in them. The key is to weigh your risks and returns and do what seems best.
Evaluate long and short term goals
Your financial goals can define your asset allocation. If you plan to buy a condo after your retirement, you can very well invest in the stock market. The short-term ups and downs won’t affect your goal as in the long-term you can expect good returns. However, if you are going to buy a house in the next 4-5 years, the stock markets may not the best option for you. Instead, you can explore bonds that are considered to be a safer option with decent returns.
Don’t rely solely on software
At times, financial advisors simply provide survey sheets to recommend asset classes. Or worse, they may use software for this purpose. The problem with these tools that don’t into account other factors that should influence the asset allocation. For instance, you may have student loans to clear or could be a single parent. Financial advisors use them as they are easy to use but as they say, one size doesn’t fit all.
When it comes to savings, you must start as early as you can. You may think you have too many responsibilities right now to even think about investing. The truth is that you will have some responsibilities that will try to dissuade you from saving. The key is to adjust your lifestyle and curb unnecessary expenses. As per a study, for every 10 ten years that you delay, you will have to save three times more to accumulate wealth for your retirement. You may start small and increase it later as your salary grows.
Monitor your investments
Your asset allocation strategy must depend upon a well-thought-out strategy. Consider the returns, your risk tolerance, and future needs of liquidity to define this strategy. Once you have allocated your money across different products, you must monitor the performance. You must assess if they are performing as per your expectations. Minor slips here and there won’t make much of a difference. The important thing is to know they are you are in a safe place.