“You have to diversify your portfolio.” This advice comes from years of experience that teaches investors not to have all eggs in one basket, so it’s something you’ll hear over and again. But it can be tough to know how or where to start. One way to get your wealth on a profit-earning track is through strategic asset allocation.
Asset allocation strives to divide your financial assets across various baskets. Taking this step protects you fiscally because your finances aren’t connected to any single investment. You’re spreading your money around rather than putting it all in one place.
Say you have $100,000 to invest. If you put all of it into real estate, the stock market, or a money market account, you’d limit the growth possibilities. But if you carefully allocated your $100,000 into several investments, you could end up with a stronger return.
There’s little question that asset allocation allows you to achieve financial freedom in a planned way rather than a haphazard one. However, you’ll want to leverage some best practices to get the most from your asset allocation measures and choices.
1. Understand Your Risk Tolerance.
The first step to any personal investment strategy is to identify your risk tolerance level. That is, how much of a loss are you willing to take? Are you comfortable with losing money in the short term to hopefully earn more later? Or do you prefer investments that will grow slowly but consistently instead of being volatile? Risk tolerance is personal and takes time to map out. Yet it’s critical for you to determine yours before making any asset decisions.
Generally, your risk tolerance will be affected by considerations such as your age, asset amount, and money goals. For instance, if you’re nearing retirement, you may want to temper your allocation of unpredictable investments like stocks. According to Fidelity’s research, 37% of adults close to retiring have too much cash in the stock market. In other words, their asset allocation may be unbalanced for their life stage. Remember that your appetite for investing risk will likely change as your circumstances do. Consequently, you should plan on re-evaluating your tolerance every few years or after major changes such as a big raise.
2. Stay Open to Tapping Into Alternative Investments.
Even if you like to generally play it safe with your finances, you should still consider alternative investments when allocating your assets — particularly if you want to move up the ladder in terms of your overall wealth. As Justin Donald, a thought leader in the lifestyle investing movement explains, high-net-worth individuals don’t shy away from alternative investments. On average, millionaires set aside about a quarter of their assets to invest in alternative investments. And the good thing is that alternative investments are eclectic, meaning you have plenty of choices. In fact, alternative investments run the gamut from real estate and commodities to fine art, and — you guessed it — digital currencies.
One of the most attractive aspects of alternative investments is that they can produce higher-than-average returns. The downside is that those types of returns aren’t guaranteed. Take real estate. The real estate market will always fluctuate from year to year and place to place. A commercial property investment that seems appealing now may not be appealing in the future. Nonetheless, well-planned alternative investments can boost your curated asset portfolio and make it more dynamic.
3. Avoid The “I’m a Forever DIYer” Investing Route.
It’s very tempting these days to think that you can do all your investment planning solo. Certainly, when you’re young and have little money to allocate to investments, you may be able to handle your investing decisions on your own. However, you’ll gradually (or maybe suddenly) start to amass more assets in the form of cash, equities, and income. The more assets you have, the more imperative it becomes to talk to a professional advisor.
Tapping into the wisdom of a credentialed finance professional relieves you of a lot of burdens. It can also give you more insight into how to best allocate your assets. A financial planner can both educate and guide you. Though you’re not beholden to take all your financial advisor’s advice, you can learn from it. At the end of the day, you’ll be a more confident investor and feel more comfortable about where your assets are allocated.
4. Apply Asset Allocation Methodologies to all your Major Financial Objectives.
Every time you have a financial objective, review your asset allocation. What you’ll be searching for is the right way to make your objective come to fruition. Here’s an example of how this can work: Let’s say you want to save up to buy a car next year. That’s a short-term objective. To reach it, you’ll need to consider areas that will help you grow your cash quickly.
Safe bets for quick turnaround growth can include short-term bonds, high-yield savings accounts, and special high-interest CDs. Less safe ways to potentially land returns include penny stocks and cryptocurrency. As we’ve seen with the recent crypto winter, a high-risk investment can be a bust, not a boon. Consequently, it’s usually best to align a goal’s timeline with the amount of investment risk you’re incurring. Have a short-term goal? Go for a safer asset allocation. Thinking of a decades-long goal? Putting some of your money in more unpredictable places could be a good solution. (Just be sure to review your risk tolerance!)
5. Keep Folding Your Returns into Your Portfolio.
The first time an investment starts to pay off, you might feel the desire to use up all the money. Before you do, take a serious pause. Do you really need all the cash right away? Maybe, and maybe not. Frequently, investors will just roll their returns into the same or a different investment. This move offers the chance for steady wealth growth.
Each time an investment matures or produces, consider whether or not it should be put back into your asset allocation. Remind yourself that returns that are set aside can become part of your personal wealth. On the other hand, returns that are used to purchase non-assets like furnishing, clothing, and travel will be gone for good. That doesn’t mean you shouldn’t tap into your returns to enjoy life or achieve a specific goal. Occasionally, you should. You just need to be pragmatic so you don’t miss out on being able to have a more stable financial future.
Even if you only have a few dollars to invest, you’ll benefit from moving forward with an asset allocation mindset. Not only will your portfolio be diversified, but your wealth will have multiple paths to expand.
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