Before starting with online trading, a good deal of planning is sensible. Or you need expert help in planning the kind of stocks to buy, things to look out for, etc. As far as investment is concerned, asset allocation is a major aspect to deal with.
An investor must know how to arrange his/her portfolio in line with the goals he/she wishes to attain. The goal is to ensure minimized risk and greater potential for earnings, which can be long term or short term depending on the goal of the investor. The point that matters is, your investment strategy must balance risk and reward and apportion the assets based on your investment horizon and risk tolerance.
The three major asset classes are:
- Fixed-income, and
- Cash & equivalents
These have various risk and return levels. This will make them behave differently as time goes by. Financial professionals agree that asset allocation is one of the most important decisions that investors can make. Allocating your investment in these asset classes is therefore more important than selecting individual securities. It determines your ultimate investment results.
Asset-allocation mutual fundshelp investors with portfolio structures and address the age, investment objectives and risk tolerance of investors and apportion asset classes. That’s why these mutual funds are also called target-date or life-cycle funds. Critics, though, believe that a standardized solution for allocation of portfolio assets is not reliable since individual investors need individual solutions.
Strategic and Tactical Asset Allocation Strategies
Strategic asset allocation follows a proportional asset combination based on expected return rates for each of the asset classes. If stocks historically return 10% per year and bonds 5% per year, a 50% stocks-50% bonds mix can be expected to provide 7.5% returns per year.
Strategic asset allocation could get relatively rigid in the long run. That’s why some tactical, short-term deviations from the strategic mix could enable you to exploit unusual and unexpected investment opportunities. This lends flexibility, which means that you can make use of economic conditions that are more suited to a particular asset class than to others. Tactical asset allocation is a strategy that is moderately active. This is because you return to your strategic mix when you have achieved the short term profits you’ve desired.
Dynamic Asset Allocation
Dynamic asset allocation is another active strategy. This involves constantly adjusting your asset mix based on the rising and falling of markets and the strengthening and weakening of the economy. This strategy enables you to sell declining assets and purchase rising ones. You need to be constantly watching the stock market to see if it shows weakness, in which case you sell stocks anticipating further decline. If the market gets strong, you buy stocks anticipating further market gains.
Online trading with a reliable broker dealer can help you get the sound advice you need to make the right decisions. Get in touch with TradeZero at 954-944-3885 or email us at [email protected].
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