Not everyone invests the same way. Some are adventurous in their investments, while others are more conservative and prefer to sacrifice some potential return to minimize losses.
However, diversifying your investments makes you less likely to lose everything if one investment goes bad. This is what asset allocation is about.
Asset allocation is one of the most important decisions you can make as an investor. There’s also a vast array of investment options available, which makes your decision even more complicated. The key is to find an approach that works for you and stick with it.
Asset allocation spreads your investments across different asset classes. Investing in a mix of assets can help protect yourself from losing money if one asset class declines in value.
Why Asset Allocation Strategies Matter
Asset allocation allows you to manage risk and potentially earn higher returns. Because not all asset classes move in the same way or at the same speed, diversification is crucial.
Here’s an example.
Suppose your asset allocation distributes evenly between crypto and bonds. In that case, you may be able to participate in the upside of crypto while still having some stability from the bond market.
Different Asset Classes to Consider
An asset class is a collection of investments with similar characteristics and market behavior. The following are some of the most common categories:
- Stocks and Equities. A stock is a share in the ownership of a company. As a shareholder, you have the right to vote on corporate matters and receive a portion of the company’s profits.
- Cash and Cash Equivalents. These include cash on hand, investments in short-term debt instruments, and other liquid assets. Cash equivalents can quickly convert into cash if needed.
- Real Estate. This typically includes houses and lots, buildings, and retail centers. Investors usually seek to generate income through rental payments and capital appreciation.
- Bonds. A bond typically represents debt issued by a government, corporation, or other entity. When investors buy a bond, they effectively lend money to the issuer. The issuer then periodically pays the bondholder with interest.
- Forex. Forex, short for “foreign exchange,” is the act of simultaneously buying one currency while selling another. It speculates on the future value of a currency pair, such as the euro against the US dollar.
Also, while many still consider cryptocurrency an “alternative” investment, it is fast becoming a viable class for allocation. Crypto has become more mainstream, leading to some crypto exponentially increasing in value.
How to Pick the Right Asset Classes
When it comes to allocation, there is no one-size-fits-all solution. The best way depends on your circumstances. There are two factors to consider when choosing which classes to include in your allocation:
1. Your time horizon. Are you investing for the long term or the short term? The ability to take on more volatility in your portfolio is directly proportional to the length of your investment horizon.
2. Your risk tolerance. How much potential loss are you comfortable taking on? If you’re willing to take on more risk, you can potentially earn higher returns, but there is also the chance of losing money.
How to Balance Returns and Risks
When investing, there is always a risk vs. return tradeoff. How can you balance the two? Here are a few tips:
1. Diversify your portfolio. Invest in various assets, including stocks, bonds, cash, and crypto. By spreading your money around, you can reduce the overall volatility of your portfolio.
2. Know your goals. What are you trying to achieve with your investments? Understanding your goals is important because it will help you determine how aggressive you’re willing to be.
3. Know the pros and cons of each class. Before investing, understand that each class has its advantages and disadvantages. Some classes are highly liquid, while others are more resilient against inflation.
How to Move Once You Made Your Asset Allocation Decision
A diversified portfolio that helps you reach your financial goals while maintaining a healthy risk/reward ratio is what you should aim for.
A good starting point is to allocate 60% of your portfolio to stocks and 40% to bonds; however, this isn’t set in stone. From 60/40, you can adjust your portfolio allocations based on your goals, time horizon, and tolerance.
If you’re far from retirement age, your investment portfolio might be more aggressive. Thanks to your extended time horizon, there’s more time to recover from market downturns. On the other hand, people who are nearing retirement don’t have that much leeway.
Talking to a financial adviser can significantly help. As a result of discussing your objectives, level of risk tolerance, and investment horizon, they should provide you with tailored recommendations.
As the value of your investments fluctuates, your asset allocation may deviate from your goal. This is normal and expected. If you’re investing for the long term, don’t worry about short-term fluctuations. Stick to your asset allocation plan and rebalance when necessary.
Get Started in Crypto Investing With Peccala
If your asset allocation includes crypto, Peccala can help.
Without having to research individual coins or manage your portfolio, Peccala is a smart way to start in the cryptocurrency market. Thanks to Peccala, you can forget about the technical details and concentrate on reaping the rewards of cryptocurrency with minimal effort.
Peccala makes investing in crypto easy, direct, and automatic. Get in touch with Peccala today if you're interested in learning more.