What is asset allocation?

There are many people who are a part of the stock market. Some of these people do very well and others of these people do not do well at all. Those who do well are generally those who have had a lot of experience investing in the stock market and have developed techniques they use in order to bring in the highest returns. There are many techniques that are used that many people learn about but just knowing these techniques will do you no good. They will become beneficial once you start applying them and practicing using them. You will probably not be great right at first, but over time you will get better and will start to see these techniques pay off.

One such technique is asset allocation. This is a technique that greatly reduces risk while allowing you to still invest in companies that are very risky to invest in. That may sound like an oxymoron but it is not. Using asset allocation you can invest in the risky spots with out too much risk involved. It is a neat process.

Asset allocation basically means that you divide your money up and distribute it out amongst many different assets rather than just one. You may invest some in stocks, some in bonds, some in mutual funds etc. You take your money and distribute it out in many areas so that even if the price drops in one area it will not have too huge of an effect on you. Because it is distributed in many areas there is a very small risk.

Benefits of asset allocation:

• One benefit of asset allocation is the very thing that was already talked about: reduced risk. The more areas you invest in the more likely you are not to lose money. It is uncommon that all of the areas you invest in would go down at one time. It would be very strange if they did. Since your assets will not all fall at the same time you can rest assured that your money is safe. You cannot lose it all. You may lose some in one area but you will most likely gain in another area.
• Another benefit is that you can determine where you invest your money and how high of risks you want to take. You can decide how many risky places you want to invest in. Your allocation plan is up to you. Maybe you want to take risks but you do not want to take to huge of risks because you are afraid to do so. Maybe you do not care about the risk and you just want to invest in a lot of different areas that look like they are going to go up. Asset allocation is great because you can invest in so many different areas with so much more safety than just investing in one stock or one bond.

Drawbacks of asset allocation:

• Even though there are great benefits to asset allocation, there can also be some drawbacks. For example, say you invested your money in many different areas. Say that one of the stocks you invested in all of a sudden boomed and you made a lot of money on it. At the same time, a few of the other areas where you invested fell. This means that you will make less money than you thought because although you made a lot, you also lost a lot.
• Finally, a drawback would be that if you invested your money in many different places and one of those areas boomed, you would not make as much money off of it as you would have if all your money had been invested in it. It goes back to the risk/return policy. The higher the risk, the higher the return. Using asset allocation can lower the risk, but it can also lower your return.