Your Money: How asset allocation can help reduce risks

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It may not be very complicated to determine your financial goal-a comfortable retirement, children's higher education, a new house or a new car are some of the popular goals but developing an appropriate asset allocation plan designed to meet those goals can be reasonably easy. Using online asset allocators can prove to be valuable to reduce volatility in your portfolio and enhance diversification.

While generally investments involve risks including a possible loss of principal, the risk gets proportionally mitigated when allocated prudently in different asset classes. This process is also known as diversification. Typically, higher the returns, higher the risk involved. Investors should understand fluctuation is one of the core characteristics of equity investments.

Stock prices change, sometimes rapidly and dramatically due to factors affecting individual companies, particular industries, sectors or general market conditions. Bond prices generally move in the opposite direction of interest rates. The biggest factor in determining long-term investment success has been asset allocation. Asset allocation is investing your money in different categories of assets-typically equities, bonds and commodities, so your investments are well diversified.

Asset allocation is based on the premise that the different asset classes have varying cycles of performance. Ultimately, the objective of a good asset allocation plan is to develop an investment portfolio that will help you reach your financial objectives with the degree of risk you find comfortable.

Reduce risk

Portfolio diversification may reduce the amount of volatility you experience by simultaneously spreading market risk across many different asset classes.

Improve your opportunity to earn more consistent returns over time. By investing in several asset classes, you may improve your chances of participating in market gains and lessen the impact of poor performing asset categories on your overall portfolio returns.

Stay focused on your goals. A well-allocated portfolio improves the need to constantly adjust investment positions to chase market trends, and can help reduce the urge to buy or sell in response to the market's short-term ups and downs.

Source: Quantum Mutual Fund