Asset Allocation: The Key to Building a Diversified Investment Portfolio
Investing can be a complex and intimidating process for many people. But one of the fundamental concepts that can make it more manageable, and rewarding is asset allocation. So, let’s break down the concept of asset allocation into simple terms, explaining its significance, the connection between asset management and risk profiles, and how it can help you build a diversified investment portfolio.
By the way, you can catch Adrian Saville from Genera Capital chatting to Wealthstack CEO, Vincent Heys in this podcast episode. They cover the basics and the intricacies of asset allocation. It’s an episode you don’t to miss – Adrian has over 20 years’ investing experience and is a professor in the subject too. Go on, learn from the best!
What is Asset Allocation?
Asset allocation is like building a well-balanced diet for your investment portfolio. Just as you need a mix of different foods for a healthy body, you need a mix of various asset classes for a robust investment strategy. Asset classes are categories of investments with similar characteristics and behavior. Some common asset classes include equities (stocks), bonds, cash, property, and commodities.
What you need to know about Asset Allocation:
While you may not be a professional investor, we are all about making money matters simple again so here’s a few key points on Asset Allocation. Once you understand the basics, you can feel more confident on your journey to financial wellness – reaching out to a trusted investment professional is not a bad idea either!
Strategic Asset Allocation and Risk Profiles
When you, an investor, signs up for an investment account, you are required to complete a risk profile. This profile helps portfolio managers or product providers understand your risk tolerance. Once the risk profile is established, your portfolio manager translates it into an asset allocation strategy. This strategy involves selecting a mix of asset classes that align with your risk profile and investment objectives. More on risk profiles here.
Time and Asset Allocation: The Power of Compounding
Two critical factors can significantly influence your investment results: time and asset allocation. Time is a powerful component that allows investments to compound, correct errors, and benefit from successful results. Since time is beyond your control, the sooner you start investing, the better. Asset allocation, on the other hand, involves selecting different asset classes based on their unique characteristics and behaviours, contributing to a well-rounded portfolio.
Traditional and Non-Traditional Asset Classes
Traditional asset classes like equities, bonds, cash, and property are more familiar to most investors, commonly found in mutual funds or retirement portfolios. However, there are also non-traditional asset classes, such as venture capital, private equity, and various commodities. These alternative assets are less commonly used but can add diversity and unique opportunities to a larger investment portfolio. Adrian and Vincent go into detail in this podcast.
The Difference Between Public Equity and Private Equity Asset Classes
Public equity refers to stocks of companies listed on public stock exchanges, which are easily accessible and traded. In contrast, private equity involves investing in companies that are not publicly listed, requiring larger capital amounts and longer holding periods. Private equity offers unique opportunities but is less liquid and involves more risk.
Strategic Asset Allocation Helps You Build a Diversified Investment Portfolio
Balanced funds or traditional portfolios typically allocate a significant portion to equities and bonds. However, a more diversified approach, as seen in the Yale endowment model, suggests allocating to various asset classes like developed market equities, emerging market equities, inflation-protected bonds, hedge funds, and private equity. This diversification reduces risk while maintaining the potential for strong returns.
Asset allocation is the cornerstone of successful investing. By diversifying your investment portfolio across different asset classes, you can reduce risk while maximizing potential returns. Understanding your risk profile, considering various asset classes, and taking a long-term approach can lead to a well-balanced and rewarding investment journey. Chat to a Wealthstack Expert to tailor your asset allocation strategy to your specific financial goals and risk tolerance. Remember, the key is to get started early and stay disciplined throughout your investment journey (create a Wealthstack Dashboard to track your progress). Happy investing!
P.S. If you’d like to find out more about the 4 investment vehicles you can choose or perhaps start with the basics and learn how to plan your finances so that you have space in the budget to invest, have a look at our Financial Resources. We’ve got podcasts and articles and more that are waiting for you!