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Asset Allocation for Beginners

Apr 9, 2008
One of the primary goals of asset allocation is to balance risk and reward from the overall investment choices. Determining overall risk and reward is extremely important when it comes to the planned time line of your investment.

For example, if you are a 25 year old, you want to choose assets that have a higher risk because you intend to work for a good number of years. However, if you are 60 years old and plan to retire at 65, you would more than likely desire more a conservative investments allocation.

Some investment allocation choices include:

Cash. Cash is considered a very liquid investment. This can include money in a savings account, a money market account or any other account where you can easily deposit or withdraw the amount of money. The rate of return on these types of choices is usually very low.

Real Estate. You don't have to be an apartment owner to have real estate investments. In fact, anyone who owns a home has an investment in real estate. When figuring out your asset allocation, don't forget assets that you may take for granted.

Over the long haul, real estate has tended to increase in values. However, there is still risk associated with this type of asset.

Stocks. Stocks are considered ownership in a company. Many individuals are given stock options from the company they work for. Others may just decide to purchase a specific company's stock on their own.

By having ownership in the company, you are linking that specific investment to the healthiness of the company. For someone who purchased Enron stock, the decision was a bad one. For someone who purchased Microsoft at the initial roll out, the decision was a great one.

Bonds. Bonds are basically a debt. If you are to purchase a bond from a company or a government agency, you are basically giving the bond issuer a loan. The bond will state the repayment terms and interest rate. Repayment terms are usually very long-term, such as ten years or more.

For the most part, bonds are usually pretty stable, so long as the issuer is stable. Junk bonds have been the riskiest as they are rated risky by credit rating agencies.

Precious Metals/Natural resources. Do not forget the diamonds! Or gold. These types of investments are usually considered safe during troubled financial times. But even without troubled times, some individuals just like to purchase these types of assets.

The overall goal of diversification is to gain assets that have little to no correlation to each other. For example, gold may rise, real estate may fall, but they are not linked together so market downturns won't mean a huge portfolio drop.
About the Author
Caterina Christakos is an experienced investor and instructor with World Capital Institute. Ever imagined yourself as a stock or commodities broker? Check this out: http://www.worldcapitalinstitute.com
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