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After going through Asset Classes last week, there is just one quick thing we need to look at before we move on to investing into Unit Trusts. I touched on Asset Allocation briefly in the last post, so in this post I will go through Asset Allocation in a little more detail so that you can build a better understanding and knowledge base.
Asset Allocation is how you divide your investments between the Asset Classes. So it is deciding how much cash, bonds, property and equity you want in your investment.
Asset Allocation is, in my opinion, one of the most important decisions you make when it comes to investing and achieving your investment goals. Before you go ahead and select which bonds, equity etc you want in your portfolio, we first need to determine, how much of each asset classes you need in your portfolio to achieve your specific investment goal or goals. The reason for this, is because each Asset Class attracts its own amount or risk vs reward.
So for an example, if you want to only invest for 2 years, you will be silly to select a fund that has a high equity exposure. The reason for this, is that markets go up and down, and in the short space of time you have no idea if the market will be down or up, so you’re really taking a huge gamble, instead of taking a calculated risk.
Why is ASSET ALLOCATION so important
Asset allocation is important for two reasons:
1. Because you get diversification, not putting all of your eggs into one basket.
2. You can tailor make an investment portfolio that will suit your investment term, goal, or risk appetite.
What is risk tolerance or risk appetite?
Every investor has his or her own tolerance towards investment risk. Some investors are a little more daring and some are more conservative. Neither personality is right nor wrong, it’s just that we are all different and have different values. Understanding your risk appetite is very good as this will limit you from entering into an investment that will totally freak you out. The last thing you want to do is go into a high risk investment and you’re an extremely conservative investor.
However one also needs to understand that in order to achieve certain goals you need to have varying levels of risk in your portfolio. So hopefully this blog post will help you make a more educated choice on achieving your investment goals, by having the right ASSET ALLOCATION to maximize your potential.
“Any fool can know. The point is to understand.” Albert Einstein
Rule of thumb
Below we will look at asset allocation models, for you to get an idea of how to set up investments for different goals, time horizons and also to get you to understand the different risks involved in each option.
However before you make any major investing decisions and if investments are not your favourite thing, please don’t be shy to consult a CERTIFIED FINANCIAL PLANNER®! At least after this post you will have the foundation of what they will be talking about, and have more of a role in constructing your portfolio.
A High Risk fund would consist of pure equity’s. You would normally invest in a high risk fund for a minimum of 10 years.
One step down would be your Moderate High Risk investor, and that would be for an investment that has a 5- 10 year time horizon.
A Moderate Risk investor would have an investment time horizon of at least 5 years.
Moderate Conservative Risk investor, would be an investor with a time frame of 2-5 years.
Conservative Risk investor, for an investment of one year you would most likely go to a Money Market account.
The reason why I have gone through Asset Classes and Asset Allocation, is because it is fundamental for you to understand these principals before you can become successful in investing. The more you understand something, the more confident you will become, and my aim is to get you confident, so that you will be putting your hard earned income away smartly and benefiting maximum reward.
“The beautiful thing about learning, is that nobody can take it away from you.” BB King
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All Video Clips supplied by Allan Gray
August 25, 2014
Grant van Zyl