Asset allocation – balancing the risk versus reward ratio

Posted By Keira Hardy on Aug 24, 2016 |

   Any investor who fails to get a firm grasp of the property distribution goes down and loses everything. This is the sad truth which we hope to change. Smart investors use this as an investment strategy that helps them to balance the risk vs. reward through adjustments of the percentage of all assets they use in their investment portfolio.

    The world of financial experts came to a consensus in which they state that the proper asset allocation plays a significant role in the increase of the returns in any investment portfolio. They also indicate that different assets act differently depending on the conditions of the economy and the type of the market. From this, we can conclude that asset allocation plays a significant role in many corners of the financing world.

    Crucial result of the proper asset allocation is the decrease of the risk involved in the investment. Every asset class offers a different type of return and distribution of the property works toward correlation of those assets. This allows investors to diversify their investment portfolio assets which reduce the risk. A good investor will be able to calculate the expected return and perform those calculations.

This rather backward approach to the forecasting of returns in the future is not as simple as it seems. The amount of statistical data that influences the decisions spans in the history of the asset and the market and simple terms, these expectations of the risks in the future are based on the past.

   Risking the investment solely on the events in the past carries a lot of risks as the asset may not act as it acted some time ago. The risk is multiplied with the possibility of the “butterfly effect”. This term represents the possibility of a tiny error significantly influencing the outcome of the investment.

   Asset allocation is nothing but a grouping of the similar resources in ad hoc groups. The grouping is done to collect resources that share similar characteristics including return and risk. Following this notion, we can recognize two types of asset groups, traditional and alternative assets.

    Fixed assets are all the assets that belong to three classes:

–    Cash (this represents all forms of capital including money market funds and deposit accounts)

–    Stocks ( which covers all stocks found on the market as well as all forms in which a stock can be represented including growth, value, and dividend)

–    Bonds (The fixed income from securities as well as government and corporate bonds of all possible types including long-term, foreign and domestic).

Alternative asset classes cover all other goods that don’t belong to the traditional classes. The most known and traded asset classes that belong to alternative derivation are commodities and foreign currency. Other notable alternative assets include all forms of insurance products (personal insurance, annuity and so on), real estate, venture capital, private equity and so on.

    Even though it is considered as an alternative asset class the foreign currency belongs to the biggest trading market known as Forex. Read More about Online Wealth Market.