Allocation Definition And What It Means For Investors


The allocation definition depends upon what type of allocation you are referring to. For investors like you, allocation probably refers to asset allocation. Asset allocation is the use of a plan to adjust percentages of each area of your portfolio. It depends upon several factors. In order to benefit from asset allocation, this post will explain each item of information that factors into proper asset allocation. With this information, you will be better prepared for success in the market.

Time Frame

Time frame refers to the amount of time before you anticipate taking your money out of the market. Where you will decide to allocate your assets is highly dependent upon whether you are planning to invest for the long or short term. Obviously, some stocks are better suited for short term gains than others. The portfolio of a young investor just starting out should look extremely different from his seasoned colleague on the cusp of retirement. If you are looking to properly understand the definition of asset allocation, you have to be aware of the role time frame plays.

Risk Tolerance

Another factor in proper asset allocation is risk tolerance. Specifically, your personal risk tolerance. If you tend to be very conservative with your funds, you would not want to allocate a large percentage of your portfolio to high risk securities. However, if you are a person that prefers the chance of greater payoffs you probably will tolerate more risk. Therefore, you would be unsatisfied with a portfolio dominated by relatively safe investments. Make sure you know the amount of risk you are comfortable with. Your personal asset allocation will be highly dependent upon your tolerance for risk.

Personal Goals

Personal goals also play a huge role in defining proper asset allocation. Your reasons for investing probably vary greatly from other investors. There is no set formula for perfect asset allocation. You will never be guaranteed to make money. However, if you know what your goals are before you choose investments, you will give yourself a much better chance at doing well. Before trying to figure out the right asset allocation for you, be sure of what you want to get out of your investments. Stick to those goals. This will help ensure your portfolio is representative of your needs. Personal goals play an enormous role in proper asset allocation.

Know Your Choices

The three topics listed above will factor into proper allocation for you. However, it is important to know your choices in order to be able to fully grasp this concept. Stocks like Intuit stock are not the only investment you can make. Bonds are another option. Knowing your personal goals, risk-tolerance and time frame will help you to decide which form of investments are best for you. It will especially help you determine what percentage of each investment is best to allow you to reach your goals. Knowing your choices is a huge consideration in proper asset allocation.

Hopefully now you have an idea of what exactly the allocation definition is. It is not as simple as you may have originally thought. However, when effectively implemented it provides you a greater chance of success in the market. Consider your personal goals, time frame and risk tolerance in order to properly allocate your assets. Countless other investors reap the rewards of proper asset allocation. Now that you know the definition of allocation, you can too.

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