What is Asset Allocation?

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Welcome to the Investors Trading Academy talking glossary of financial terms and events.
Our word of the day is “Asset Allocation”.

Asset allocation refers to the way your investments are diversified across different asset classes, such as stocks, bonds and cash, to meet your goals given your risk tolerance, tax status and time horizon. Essentially, asset allocation means dividing your assets among different broad categories of investments, called asset classes.
Stock, bonds, and cash are examples of asset classes, as are real estate and derivatives such as options and futures contracts. Most financial services firms suggest particular asset allocations for specific groups of clients and fine-tune those allocations for individual investors.
The asset allocation model — specifically the percentages of your investment principal allocated to each investment category you’re using — that’s appropriate for you at any given time depends on many factors, such as the goals you’re investing to achieve, how much time you have to invest, your tolerance for risk, the direction of interest rates, and the market outlook. Many brokers offer pre-defined asset allocation models, called target models that you can use as a framework for structuring your portfolio.
Ideally, you adjust or rebalance your portfolio from time to time to bring the allocation back in line with the model that suits the individual investor. Or, you might realign your model as your financial goals, your time frame, or the market situation changes.

By Barry Norman, Investors Trading Academy


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