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The No.1 Rule for Investors

Asset Allocation is the process of balancing, mixing and rebalancing your investments such that you take advantage of rises and minimise losses across your entire portfolio. Assets are the investments that you’re in. Asset classes are traditionally cash, fixed-income, equities (stocks) and property (real-estate). Non-traditional or alternative assets include commodities, currencies and hedge funds. There are many more, but these are the larger classes. As an investor, you typically make investments into these classes. Some people invest 100% of what they have into real-estate, some into equities. But as a general rule, an investor should have some diversification in their investments. It’s like not putting all your eggs into one basket. The Asset Allocation process starts with your asset mix. Viewing your entire investment portfolio in terms of what asset classes you have. Then we look at how balanced this is according you’re your risk profile. Financial professionals have lots of surveys and tools to help determine your risk profile, but a simple view is to look at your age. Someone who’s younger has a lot more years left so they can assume more risk. Someone who’s near retirement cannot. Once you view your asset balance then you can regularly (quarterly or yearly) make adjustments as your assets grow or lose value. This is called rebalancing. By doing this you’re going to have the best chance of growing your entire portfolio over the long term. Let’s look at some asset classes:

Security (Lowest Risk)

  • Home equity
  • Cash
  • Bonds
  • Fixed-income
  • Annuities

Growth (Medium Risk)

  • Equities
  • Managed/Mutual Funds
  • ETF
  • Investment Property
  • Options

Momentum (Higher Risk)

  • Commodities
  • Currencies
  • Hedge Funds
  • Leveraged ETF

A typical asset balance based on your age would be:

<40 years – (Security) 30%, (Growth) 35%, (Momentum) 35%

40 to 60 years – (Security) 50%, (Growth) 25%, (Momentum) 25%

>60 years – (Security) 70%, (Growth) 15%, (Momentum) 15%

When you tally up all the investments you have in the Security class, what percentage are they compared to your total portfolio? If you have more than recommend, you should consider allocating more funds to assets in the other classes. As assets in the Momentum class start performing, then sell some down to keep within your other classes and allocate those funds to Security and Growth. Always fill up the Security class first, then Growth then Momentum. In doing this you’re keeping diversified and are less likely to be impacted by any one investment tanking. And of course, you’ll benefit from any investment that shoots up also. Is there more to this process? There sure is, so take the time to find out more.

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