How finance folk use it
In investing, asset allocation is a strategy that involves distributing your money across different assets to make your portfolio. This aims to balance risk and returns according to your goals, risk profile and investment horizon.
Is it good or bad?
The three main asset classes - equities, fixed-income, and cash and equivalents - have different levels of risk and return, so each behaves differently over time.
Proper assets allocation will help you invest to reach your goals when you need to without taking on more risk than you’re comfortable with. It takes some knowledge of the characteristics of the different assets, so you can distribute your total investing money accordingly.
What it means for you
Allocating too much money for assets that have the low risk potential might hinder you from reaching your goal by the time you need the money. That’s because such assets typically have low potential returns.
On the other hand, allocating too much money for assets that have high potential for profit might cause problems later on if they don’t give the returns that you expect, or even lose value. That’s because such assets typically have high risk potential.
That’s why, when you invest in more than one product, asset allocation is necessary for you to maintain the right mix of risk and returns. You can read more about the details of asset allocation here.
