Selecting perfect investment portfolio out of various choices of bonds, mutual funds and numerous stocks is truly a tedious job for experienced investors. While selecting the portfolio, selecting the stocks in first instance may not be a wise strategy. It may be more beneficial when you choose a blend of stocks, mutual funds and bonds to build your portfolio. Selecting appropriate assets blend to construct an investment portfolio is often referred as asset allocation

The Asset Allocation – Defined

Construction of a balanced portfolio comprising of various asset types like stocks, bonds, cash and mutual funds is commonly known as asset allocation. Asset allocation is made to control the risk by diversification of investment into various asset groups. Various classes of assets carry different risk and return behaviors. The risks and rewards of various categories are cross linked with others and the overall risk is minimized over the period of time. Although there are some criticisms too attached with asset allocation, but in overall scenario it is considered a widely accepted technique.

The investments gurus agree on the fruitfulness of the technique of asset allocation and investors adopt it widely. This refers that allocation of your amounts to various risk-bearing stocks or bonds is the primary function of investment and than comes the question of which stocks or bonds to pick out of available choices.

There is no hard and fast formula of asset allocation which leads us to have a perfect blend of assets. Had it existed, for an instance, it would not be possible to explain the pros and cons of it in one go. However there are few lines here which will guide to have a better combination of assets.

Compare Risk and Returns

The technique of asset allocation revolves around balancing the risk and returns. Having maximum returns from an investment is a core desire from any investment but selecting the asset which offers maximum return needs deep studies. Everyone runs for an investment yielding maximum return which ultimately lowers the rate of return by pushing up prices of the asset. It was evident from the resections of 1929, 1981, 1987 and 2002. A vigilant investor always considers the risks associated with higher yielding investment.

Limitations of Financial Module or Planner Sheets

The financial software or planner sheets are developed over certain basic assumptions. When the assumptions do not stand valid the module may not give valid results.Likewise the different modules lack different information which the other is presumed to take into account. For an instance the expert suggest that subtract age of the investor out of 100 and then invest the remainder in terms of percentage of your portfolio in stocks and the amount equivalent to your age reflected in terms of percentage of your entire portfolio be invested in bonds or in real state.

Thirdly the modules and the planner sheets give persuasive decisions rather than conclusive decisions. Therefore complete reliance over the financial modules or planner sheets may not be appropriate.

Short Term and Long Term Goal

Setting goals in life whether long term or short term facilitates you define and set your priorities and your financial needs.

Do not forget to account for your short term or long term life goals while allocating your assets among various asset classes. It’ll develop better coherence of your financial needs and the resources in your future life.

Time Value of Money

Over the period of time, the amount you have in your hand looses its value and likewise the value of your requirements increases. If you postpone your savings by 10 years for your old age, you need to save three times extra amount to fill the gap, according to US Department of Labor. Saving and allocating wisely now will not only accumulate your amount but it will be compounded over the period of time. Therefore time is your good friend to enhance value of your assets.

Put the Plan in Action

After you have made a careful analysis of your asset allocation put your every effort to adopt it. Probably the first step may be how you break your current investment portfolio. It is not a difficult task. Just work out the percentage of stocks, bonds and mutual funds in your portfolio. Classify your investments in stocks according to capitalization of the company you invested in. The bonds may be classified based on their maturity. Mutual Funds may be somehow confusing as their names do not elaborate the types of investments they carry. For mutual funds their portfolio analysis is a must.

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