In the event that you are a devoted peruser of our blogs, you may have understood that we frequently accentuate on doing proper asset allocation in your investment portfolio. Building an investment portfolio through optimal asset allocation is imperative while you attempt to accomplish your investment objectives to achieve financial freedom. So in this article, we thought of clarifying asset allocation to you citing the benefits it offers to you as investors.
What Is Asset Allocation?
Asset allocation refers to the spreading of your surplus across multiple asset-class including equity, debt, gold, real estate and other money-market instruments to ensure that the investment portfolio’s risk and reward are balanced. Asset allocation helps investors in minimizing the risk of their investments through diversification. If you look at the historical returns of stocks, bonds, and cash haven’t moved as one. There is no direct correlation between these three. Under certain market conditions, not all asset classes can move in the same direction. A market condition that leads one to outperform might cause another to underperform.
In addition to diversification, the asset allocation is vital to achieve your financial goals and have that kind of freedom that you always longed for. But, that’s not all – there are many benefits of asset allocation and can work as a key to your financial freedom.
5 Reasons why Asset Allocation can help you achieve your Financial Freedom
Many investors have a habit of investing in impromptu ways. Without proper asset allocation, it becomes difficult for them to find out whether the returns received on investments is enough to achieve their financial goals or not. It is because some investors are too aggressive and some are too conservative, so they are unable to earn optimal returns required to fulfil their financial goals.
But, with proper asset allocation, one can learn how much profit he/she can earn on investments based on investment risks.
Investors make investment decisions either based on their past investment experiences or risk tolerance. If you’ve earned a good profit in the past, you might become an aggressive investor who would give preference to equities. While if you’ve already burnt your fingers and incurred significant losses, you may become too conservative and invest only in fixed income instruments. However, learning from past experiences is not a bad thing. Sometimes, investors made mistakes of investing in riskier asset classes like equities to achieve their financial objectives and become the victim of volatility. Asset allocation provides them with the right exposure of asset-classes that they needed to minimize risks and generate optimal returns to achieve your financial goals.
Help Investments Align with Time Horizon
Time horizon is one key factor to be considered at the time of investing. Different financial goals have different time horizons which demand different strategies to approach. Similar to this, asset classes tend to move differently in certain market conditions. As you know that equity investments generally have a higher risk and higher reward potential. But, on long-term equities are less risky. While debt is considered risky in the long-term and can benefit more in short to medium-term goals.
Proper asset allocation helps you align your investments with your time horizon by determining an ideal mix of assets based on your time horizon.
Would investing all your savings in stocks or fixed deposits will benefit you from the taxation point of you?
Absolutely not! If you’re doing the same thing, you are making a huge mistake and must be paying a huge amount in taxes which otherwise could have been saved if you’d spread your investments across the multiple-asset class. With the asset allocation, you can spread your surplus even in tax-saving investment schemes that can help you save taxes and ultimately, your financial goals.
Due to unavoidable circumstances, the investors were forced to stop their investments for urgent funds. They were forced to redeem their investments long before achieving their financial goals. However, it is not wise to stop your investments in the middle. To avoid such circumstances, asset allocation can help you spread your investments in high and low liquidity assets so that if you’d required some funds in future, you can have ample liquidity without disturbing your overall investments.