Asset allocation – What is it, definition and concept | 2022

That is, when we invest, it is not advisable to do so in a single type of asset. For example, we can buy shares, but, perhaps, we are also interested in acquiring a place to rent. In this way, the possible losses of one can be offset by the gains of the other.

Therefore, we are talking about an economic concept related to diversification. Thus, when we invest we must do so from various perspectives, so that we can obtain the highest possible profit, risking what is necessary.

The Asset Allocation Process

The asset allocation process is similar to the one that can be carried out in any type of personal or company plan.

  1. First of all, what do I want to achieve? This would be the main objective. Therefore, it is our goal as well and it will allow us to know what we can do to reach it. Of course, in this case we must use a monetary value.
  2. The second question is what do I have to invest? We have to do some simple calculations. First, if we have some initial savings and second, what monthly amounts can we dedicate to this.
  3. Now we must ask ourselves, how are we going to achieve it? In this case we trace a strategy to reach the goal. This is when we must decide what we will invest in and advice is essential.
  4. Related to the above, we have to think about what profitability I want to achieve and what risk am I willing to assume? Based on questions 3 and 4, we will choose the investment portfolio that best suits us. This step is where the asset allocation takes place.
  5. Finally, the question would be who am I going to hire for my investment portfolio? Once we are clear about what we want, how and under what conditions, we must find the right financial institution or broker.
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Asset allocation strategies

When deciding on investments and their diversification, it is useful to know the types of allocation strategies that we can carry out.

  • Strategic and dynamic assignments: Its objective is similar in both cases, to obtain an optimal combination of assets that maximizes profitability and minimizes risk. The difference is that the dynamic adapts over time and the strategy does not.
  • Tactical Assignment: This differs from the previous two in that the investor in them adopts an active approach with the main objective of maximum profitability.
  • Satellite core assignment: In this case, there is a main aspect, formed by a strategic assignment and a dynamic or tactical satellite.

Recommendations on asset allocation

Let’s see some recommendations in asset allocation, related to their particular characteristics.

  • We must always bear in mind that past returns do not guarantee future ones. Furthermore, this can be extrapolated to time. A short-term return does not have to be sustained in the long term.
  • Sometimes our perception of risk changes when we see that we can obtain good returns. We must be clear about our investor profile and be guided by it.
  • In any investment, there is always the possibility of having to wait to sell because the price has dropped. Keep this in mind and use money that you can do without for a while, at a given time.
  • Finally, we must heed the saying that no one gives something for nothing. High return is often accompanied by high risk. We must never forget this economic maxim.

Types of assets to invest

To finish, let’s see some types of assets in which we can invest and that we can classify into two large groups.

  • First we have the traditional ones. These are the best known and used. Stocks, debentures or bonds and currencies. In this case we are dealing with the so-called financial assets that are usually traded on regulated markets such as the Madrid Stock Exchange.
  • Then we have the alternatives. These are less common and include real assets such as homes or premises. We can also invest in derivatives, art, venture capital or raw materials. The sale is made in regulated markets or directly between the parties.
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Therefore, a good asset allocation should perhaps include both groups, so that risk can be maximized and cost minimized.

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