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Zhi Finance » What is asset allocation? How to do?

What is asset allocation? How to do?

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Asset allocation refers to balancing multiple types of assets according to the proposed strategy to form an asset portfolio. For the average family, the investment assets are divided into three categories: stocks (or owner’s equity), bonds and cash. After reading this passage, you will be able to master all the necessary knowledge to balance your portfolio.

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First, let’s introduce the definitions of several words:

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Common stock: In financial circles, the name of a stock in financial statements.

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Bonds: Bonds are debt and credit certificates issued by enterprises or governments; Investors usually earn interest on a regular basis, and when the life of the debt reaches the end, that is, the maturity period, the principal is recovered in a lump sum.

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Cash: In investment jargon, cash refers not to money tucked under the mattress, but to money deposited in a bank or similar place. Government and corporate bonds with short maturities of 30 to 90 days are also often included in investors’ definition of cash.

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If you want to invest in all these asset types, you can invest in public funds and exchange traded funds (ETFs) at the same time.

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Stocks are the most risky and the return on investment is usually considered the highest. The risk of bonds is small, but there is still the risk of loss of principal. The income of bond funds varies greatly every year. Cash is characterized by low risk and low return.

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The purpose of capital distribution is to make the three indicators cooperate with each other; They are: the risks that can be undertaken, the returns that can be obtained according to the investment objectives, and the investment objects in the portfolio. To achieve short-term goals, you usually only need to invest in cash, or both cash and bonds. To achieve such long-term goals as pension, it is wise to combine the three investment methods.

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When people are in their twenties, they can calmly invest in retirement. If they are brave enough to take risks, they can even move 100% of their funds to the stock market. With the growth of age, retirement is approaching, and the impact of major investment failure on income is growing. People tend to move more money to bonds, or even save a little cash. For most people, it is safer to leave some money to invest in stocks, because after retirement, they will have to live for 20 years or more.

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There are no absolute rules for asset allocation, but many investors seem to believe that an asset class accounts for at most two-thirds of a portfolio.

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Some investors “capture the market opportunity” by transferring the asset allocation, that is, they do not transfer the asset allocation according to their actual situation (for example, they are going to retire soon), but make decisions according to their subjective opinions on market changes. This approach will increase the risk of portfolio, because new variables are added to the formula of balanced portfolio. You have added your ability to predict the economy and finance to the already complex formula. A large amount of evidence shows that even the President of the Federal Reserve Bank of the United States believes that it is difficult to predict the economic results, even if he can influence these results more than anyone else. Therefore, you are likely to do worse than him and make the wrong asset allocation at the wrong time, causing losses that you do not want to bear.

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You can gradually adjust your asset allocation in a lifetime, and you should do the same. You often just need to put the newly earned dollars into the asset class that you think will increase in value. Over time, the investment proportion of other assets in the portfolio will decrease. In this way, you do not have to adjust the distribution by selling assets.

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By carefully adjusting the asset allocation, you can better prepare for retirement.