A-Z of Personal Finance: A – Asset Allocation

Diversification
In many ways asset allocation is synonymous with diversification. In addition to diversifying across asset classes or even geographically, you should also be diversified within each asset class. For example, when it comes to investing in stocks, instead of investing all your money in just one or two companies you may choose to invest in different sectors including banking, manufacturing or insurance. This helps you diversify your investment risk as any losses caused by the downturn in one sector may be offset by a rise in another; it is unlikely that all sectors will perform in exactly the same way and decline at the same time unless there is a general reversal of the entire market. Asset managers generally seek to ensure that no single asset represents more than say five to ten percent of your total portfolio.

Diversify according to your goals

Based on your various goals, you require different levels of liquidity. For your short-term goals such as the funding of a family holiday or a family wedding this year or next, you will require cash to make payments. For the longer-term goals such as the funding of your children’s education or your retirement, your investments in the stock market or real estate will offer you better prospects for long-term growth.

Bear in mind that asset allocation does not assure you of profit nor does it protect you from losses in a declining market. It is important to review your asset allocation strategy periodically and adjust your portfolio as your circumstances and objectives change. This will ensure that the portfolio remains reflective of your long-term needs and outlook, whilst also addressing your short and medium term goals.

The full text appears in “A-Z of Personal Finance” by Nimi Akinkugbe. Available in leading bookstores including Glendora Books, Laterna Books, Patabah, Terra Kulture, Quintessence, Jazzhole …and online from Jumia, Amazon, Barnes & Noble, Manna Books and AMV Publishing