Don’t put all your eggs in one basket – if there’s ever a point this proverb rang the truest, it’s for asset allocation. As the fundamental motto of investors, it implies that instead of parking all your savings in a single investment vehicle like cash, stocks, bonds, or mutual funds, it’s wiser to diversify your portfolio among various assets.
Are you wondering why? The degree of risk varies across different asset classes, and to reduce the chances of substantial losses during a market downturn, you must diversify your assets. Base this diversity on your risk appetite, investment horizon, and rate of return.
Why do you need asset allocation?
Not even the most experienced of investors can predict market changes with accuracy. Therefore, spreading money across different assets becomes a natural part of earning returns and fulfilling any financial goal. Give below are three reasons why asset allocation is the right investment strategy for you:
- Risk diversification
Each category of assets has a specific risk-return tradeoff. For instance, stocks have high potential but are considered more volatile than cash and bonds. Certificates of deposit or debt mutual funds are less risky and pay low dividends, making them appropriate for short-term investments. Bonds are fixed-income securities that offer stable returns at low to medium risk but tend to underperform stocks over the long term.
With a balanced asset portfolio that takes the risk-return ratio into consideration, you can protect your overall investments even through periods of high uncertainty.
- Meeting financial goals
You could be saving up for your children’s education, purchasing a house, or planning a wedding. It’s also likely that you have multiple goals. Therefore, you’ll need to allocate among different asset choices based on each goal’s wealth requirements and your investment horizon.
For example, if you plan to save for retirement that is decades away, you can pick high-return growth assets like stocks, equity mutual funds, or real estate since you have the advantage of time. Such long-term investment products can dodge short-term fluctuations and recover until maturity. However, if the idea is to purchase a car, you want the low-risk returns that debt mutual funds offer.
- Navigating market timing
Predicting market fluctuations with precision isn’t as easy even for seasoned investors. Thus, asset allocation decided by your financial goals and risk appetite is a smarter approach since it eliminates the need for you to buy and sell at the right time. Instead, the strategy helps you increase the possibility of higher returns without being too affected by market changes.
There are many other reasons why asset allocation is the right investment strategy, including rebalancing, flexible liquidity, and future safety. If you’re new to the market, you can start with a monthly or bi-monthly SIP in the mutual funds of your choice after considering your risk tolerance, return expectations, and investment horizon.
The easiest way to get started is through verified online investment apps, such as the Tata Capital Moneyfy App, where you can access funds sorted by relevance and popularity without feeling too overwhelmed by options or worrying about the security of your investments.