Asset Allocation: Why It Matters More Than Picking Stocks

Investors who focus solely on selecting winning stocks generally miss the most important factor in successful investing: how an investor allocates their portfolio to meet their long-term objectives.

Asset Allocation: The concept of asset allocation is simple. It simply means you have invested a certain amount into many different asset classes. Asset classes can include equities (stocks), debt (bonds), gold/silver, and cash.

By using a diversified portfolio, you will minimize the impact of volatility on the overall value of your investments.

How Asset Allocation Works.

Asset allocation allows you to spread your risk over a variety of asset classes in order to minimize risk and maximize return.

Common asset classes are as follows:

Equities (stocks) – generally give you the greatest potential for growth.
Debt (bonds) – an asset class used to provide stability.
Gold/silver – a hedge against inflation (i.e., gold prices will typically rise in times of increased inflation).
Cash – allows you to take advantage of buying opportunities should they arise.

By using a proper asset allocation strategy, you will improve the chances of achieving long-term success by mitigating risks through diversification of your investments over multiple asset classes.

Why Asset Allocation Is More Important Than Picking Stocks.

1. Asset Allocation Reduces Investment Risk.

The primary reason that asset allocation is more important than stock picking is because asset allocation will reduce your investment risk.

If you solely invest in stocks, a significant market crash will put you in a position that will see you lose the majority, if not all, of your original investment.

On the other hand, by diversifying among several asset classes (debt and gold), you will reduce your exposure to loss by having the potential for debt and gold to perform better than the stock market during downturns.

 By having an asset allocation strategy, you will ensure that your hard-earned money is safely and properly managed, no matter what happens in the market.

2. Asset Allocation is a systematic way to achieve consistent portfolio performance.

Stock Picking is based upon a combination of timing and the skill of the stock picker.

Studies indicate that the returns of a portfolios are determined more by asset allocation than the stocks held in the portfolio. Thus asset allocation is a safer bet for a long-term investor.

3. Asset Allocation Eliminates Emotion-Driven Decisions

Fear and greed drive many poor stock picking decisions. Asset allocation removes emotions and creates a framework for making investment-related decisions.

Using the plan you have created to invest keeps you focused on the long-term rather than swayed by emotions, ultimately improving your decision-making as a long-term investor.

Asset Allocation vs Picking Stocks

Asset allocation focuses on strategy. Stock picking focuses on prediction.

Understanding Asset Allocation Strategies.

Conservative Investment Strategy.

Greater Debt Exposure
Less Equity Exposure
Appropriate for Low-Risk Investors

Balanced Investment Strategy.

Combination of Equity and Debt
 Appropriate for Long-Term Goals

Aggressive Investment Strategy.

Greater Equity Exposure
Appropriate for Young Investors

Ultimately, your age, income and specific financial goals will guide you in choosing what strategy to employ.

Determining Your Asset Allocation.

When attempting to determine your asset allocation, consider:

Your current age
Your current Risk Tolerance
Your Investment Horizon

Your Specific Financial Goals As a simple guideline, you can use the equation **100 minus Age = % equity.**

This guideline will assist you in maintaining your desired asset allocation balance as you age.

The Most Common Mistakes of Asset Allocation.

 – Not rebalancing Your Portfolio
– Focusing only on the Short-Term
– Putting All of Your Eggs in One Basket

To Keep Asset Allocation Working, Regularly Rebalance It.

Final Remarks Concerning Asset Allocation.

While Asset Allocation is often perceived as rather boring compared to stock picking, it is actually the most effective way for people to make money in the stock market.

The good investors realize the importance of asset allocation over stock selection; Asset Allocation will determine whether or not a portfolio is successful before the individual stocks are even chosen. For More Info : MY_OWN_CFO