Once your risk tolerance, intrinsic and time value of risk have been derived you are able to use asset allocation in order to establish what are the best investments for you.
Asset allocation is the process of deciding how to distribute your wealth among both different countries and asset classes for investment purposes.
The asset class is comprised of securities that have similar characteristics, elements and risk-reward concepts.
Understanding Asset Classes
Below are some examples high, medium and low risk assets:
The lowest level investments are comprised of smallest amount of risk and volatility and therefore represent capital stable income-producing investments. While they don’t offer a large return – the return on this asset class is practically guaranteed. This area is typically for the more conservative investor and would represent the bulk of their asset allocation.
The medium level investments have an intermediate level of risk and while they are more likely to provide capital appreciation (rise in value) than decline, there is greater chance of loss than the lower asset class. A mixture of both these assets and low level stocks is for an investor with a medium risk tolerance.
The highest level of asset allocation is for investors that have a strong understand of the stock market or have a high risk tolerance. Typically, these investors seek to gain large returns in exchange for large amounts of risk. A mixture of these assets, with high-medium end assets requires an investor to have the highest level of risk tolerance.
Getting the mixture of these assets classes correct is the key for every investor in respect of their risk tolerance, intrinsic and time values and investment objectives. The stronger understanding investors have of their asset allocation – the better picture they can have of their investment returns.