![]() Know More: What is Asset Allocation and How to do it Right?Īfter you have determined which asset allocation strategy works for you, you need to work on further reducing portfolio risk by diversifying your investments within the same asset class. Factors such as the age of the investor, risk tolerance level, investment horizon, etc., can play a key role in determining which asset classes to invest in and what proportions so that your portfolio returns are maximized, and the overall risk is minimized. Gold (2000 to 2020)Īt present, there is no single asset allocation strategy that you can stick to through your entire investment life. If you look at the performance of these asset classes over the past 20 years, you can see that historically, when Gold has outperformed, Equities have underperformed and vice versa, as shown below: Ideally, you should consider investing in a combination of asset classes inversely correlated to each other, i.e., when one asset class outperforms the other asset class underperforms. There are various strategies to determine the perfect mix of key asset classes such as Equity, Debt, Gold, Real Estate, etc. ![]() In simplest terms, Asset Allocation involves investing in multiple asset classes in specific proportions to ensure that your overall investment portfolio features minimal risk and provides optimal returns. Implement an Asset Allocation Strategy and Stick to It Once you have determined your risk tolerance and put some money aside to ensure adequate liquidity in your portfolio, it is time to figure out an asset allocation strategy that works for you.Īlso Read: What is an Emergency Fund, Why Do You Need It, and How to Build it? 3. ![]() In order to ensure easy accessibility, consider spreading the funds equally across your bank Savings Account and potentially low-risk investment options such as Liquid Funds and Overnight Funds. One way to maintain sufficient liquidity in your portfolio is to set aside an Emergency Fund equal to 9 to 12 months’ expenses. Incorporating sufficient liquid assets into your portfolio will allow your existing investments to deliver optimal long-term returns and also will enable you to benefit from periodic market corrections. This risk can be significantly reduced by maintaining adequate liquidity. Ensure Sufficient Liquidity in Your PortfolioĪ key risk to your investment portfolio is that due to a financial emergency you might need to redeem investments when markets are down. By knowing your risk tolerance, you can figure out investments that deliver the best risk-return value to manage your overall portfolio risk. This strategy is, of course, not recommended if you are nearing retirement and need to focus on the preservation of wealth. So if you start investing early in life, you can start your investment journey with a pure equity portfolio that is solely focused on aggressively growing your wealth. Thus, as a general rule, younger investors tend to be more risk-tolerant than older investors. For example, investors in their mid-20s who are unmarried have fewer financial responsibilities than investors in their late 50s who are married with college-going children. Typically risk tolerance depends on the age of the investor and his/her current financial obligations. ![]() Risk Tolerance is defined as an investor’s ability to endure the risk of losing the capital invested. In this blog, we will discuss 6 key actions that you can take to reduce the overall risk in your investment portfolio, starting with understanding your risk tolerance. Luckily while it might not be possible to eliminate the risk of your investment portfolio, there are various ways you can reduce it.
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