Asset Allocation is defined as techniques, an investor uses to distribute his investments among various other investment options such stocks, bonds, mutual funds, investment partnerships etc. Asset allocation differs from person to person depending upon their ability to take risk and their monetary requirements. Practicing diverse asset allocation models can lessen the risk of losing your money, as each asset class has a different inter-relation with other assets. An asset allocation model determines the total amount of money an investor puts into each asset class. The sole purpose of these models is to establish an investor’s personal goals and risk tolerance levels.

Types of Asset Allocation Models:

1. Preservation of Capital: Such kind of asset allocation models which are focused on preservation of capital are generally created for low risk investors. These investors are the ones who do not wish to take any sort of risk and invest for a maximum of 12 months only. Even a small amount of capital loss is unacceptable to them. They invest with short term goals in mind such as college education or property purchase. Monetary instruments such as cash, treasuries, commercial papers are the tools that compose over 80% of portfolios for this asset allocation model. The downside to such investments is that many a times, the returns gained are not sufficient for purchasing capabilities due to the ups and downs that constantly plague the markets.

2. Income: This asset allocation model’s portfolios are designed specifically to generate income for the investors. The instruments used in this model are primarily fixed-income obligations such as Real Estate Investment Trusts or REIT, treasury notes and often blue-chip company shares. These are the companies that have stable market earnings and almost no liabilities. Retirees are some of the most prominent investors in this allocation model.

3. Balanced: Between the ‘preservation of capital’ and ‘income’ portfolios, lies the Balanced portfolio. This is considered to be one of the safest allocation models as it strikes a balance between long-term growth and current income. This model results in varied assets that generate cash and work as a low risk long term investment option at the same time. The tool of a balanced portfolio is largely considered to be medium-term investment, that comes with fixed income obligations and shares of leading corporations, from whom there are more chances of getting a cash dividend. In a balanced portfolio, a very less amount of capital is invested in the form of ‘cash’ or ‘cash equivalents’.

4. Growth: This asset allocation model is targeted at investors who are looking to build long-term wealth. Only those investors who aren’t in the need of immediate cash returns invest in growth portfolios. Infact, the investors are likely to raise their investments by submitting additional funds each year. In the growth portfolio, portfolio managers often tend to introduce foreign companies, so to expose their investors to international economies provide them with multiple opportunities as well.

Asset Allocation changes with the speed of the markets and the tides of time. Investors who are active participants in the Asset Allocation strategies, often tend to observe that their requirements in life change as they progress through time. Keeping this factor into consideration, many portfolio managers recommend investors to switch some portion of their investments to other models, to keep themselves secured and financially competent for a tuning point in their lives.

This entry was posted on Thursday, May 15th, 2008 at 8:06 am and is filed under Venture Capital News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.