5 Simple Steps to Creating Proper Asset Allocation

Proper Asset Allocation

Every investor tries to build an excellent investment portfolio. To make such a portfolio, your investments require asset allocation.

In a bid to build a vast investment portfolio, most investors tend to focus on getting the best investment option, such as stocks or bonds. However, as an investor in today’s marketplace, the key to financial success and long-term growth of your investments is in a well-maintained diversified portfolio.

Take for instance a street vendor who sells both umbrella and sunglasses at the same time with the knowledge that it is easier to sell umbrellas during the rainy season and sunglasses in summer. What this example demonstrates is that as an investor, you should fill your portfolio with an appropriate mix of bonds, stocks, cash, fixed deposits, real estate, gold, pension funds, and other investments. This mix is what is known as an “asset allocation.” Your portfolio should meet your future financial requirements but still give you peace of mind.

Here are five steps to help you achieve a proper asset allocation.

Set your financial objectives

The first step towards constructing a proper allocation is to determine your personal financial goals and situation. You have to consider the amount of capital to invest, your age, future income needs, and your time horizon. When you need the money is just as important as what you’re saving, as such, your time horizon can be for a couple of months or several decades.

Your future income needs can be anything from buying a house, paying off debt, saving for a wedding, making a charitable donation, planning for a college fund or a retirement trip. Each of these goals requires a different amount of money for success. Setting your goals will help you identify the amount of money you need to save to achieve them

For instance, a 55-year older adult hoping to pay for a child’s college education and possibly retire in the next decade can’t have the same investment strategy as a 22-year old college graduate who is just starting in career. Your current wealth and saving habits versus your goals will help you determine your proper asset allocation.

Gauge your Risk Tolerance

Next, you have to factor in your risk tolerance and personality. While investing, you should base your risk tolerance on your view and attitude towards investment volatility and your time horizon. Are you willing to hazard the potential loss of some amount of money for the possibility of higher returns?

If you can’t handle the inevitable ups and downs of the stock market, fixed-income investments such as bonds may appeal to you more. Or if your investment is for a short-term goal of about three years, you can’t afford to take chances with the money not being there when you need it. If you can’t have a peaceful night rest if the value on your investments drops for a short while, then the chances are that the potential high returns are not worth the stress. What’s more, the possibility of higher returns comes with a greater risk of losses. So, you have to optimize the chance to suit your lifestyle and situation. For instance, a person nearing retirement should focus on protecting their assets and drawing income from them. On the other hand, a young person won’t have to rely on their investments for profit, so they can afford to take higher risks in the search for greater returns.

Find the Asset Class that Fit your Profile

Generally, investors who can bear more risk are more aggressive with their portfolio. If you have a high-risk tolerance, then you can devote a more substantial portion of your portfolio to equities and less to fixed-income securities like bonds. On the other hand, a person with a low tolerance level will have a more conservative collection of assets dominated by fixed income securities with fewer equities.

Choose a Mix of Assets

Keep in mind that beyond the particular fund or securities you choose, the way you distribute your funds among various asset classes has more impact on your success and returns. In alignment with this, you can divide the equity portion of your portfolio between companies with different market caps and industrial sectors. Then, you can allocate the bond portion across various subclasses such as long-term and short-term, and corporate debt versus government debt.

To enhance a diversified portfolio, some people prefer to invest in mutual funds. These funds include a wide range of asset classes, and they allow investors to hold bonds and stocks that are well-researched and selected by fund managers. If you do not like the idea of a mutual fund, you can invest in Exchange-Traded Funds (ETFs). Simply put, ETFs are mutual funds that trade like stocks. The diversification for ETFs is based on capitalization, country, sector, and the likes.

Have a Big Picture

To set up the most efficient allocation strategy for your financial goals, you have to look at your entire financial picture. It is best to diversify with an eye on all your assets, including real estate, bank savings, insurance policies, and tax-deferred retirement savings you may hold, such as an IRA.

Regularly Monitor your Asset Allocation

After establishing a proper portfolio, you still need to analyze, reassess, and rebalance it periodically. This is because the asset allocation can change over time. For instance, a rise in the assets’ value can increase the portfolio volatility, the investor’s financial status can change, and the risk tolerance of the investor can be reduced by age, especially some years before retirement. 

If any of these factors alter, you also have to change your portfolio accordingly. Rebalancing involves determining which assets are overweighted (in an excess amount) and those that are underweighted.

The Bottom Line

As you construct and reconstruct your investment portfolio, it is incredibly crucial that you maintain your diversification. Owning securities within each asset class (equities and fixed-income) is not enough; you also have to diversify within an array of subclasses and industry sectors.

As we’ve earlier mentioned, you can easily achieve superior diversification by using ETFs and mutual funds. These two are investment vehicles that allow individual investors to enjoy the considerable scale diversification that fund managers and big companies enjoy.

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Small Business Loan Is Easy to Get If You Are Doing the Important Things Right

Business Loan

When your business is in its starting phase, you need a loan to grow it. Yes, there are ways for you to start your business with very little capital, but even in the age of the internet you need loans for the growth and expansion of your business. Oftentimes, startup and small business owners are scared of taking loans because they believe returning the same loan with interest on it will hinder their growth. The fact is a loan is not such a big liability if you have done your homework before getting it. Hastily getting a loan without researching the market and knowing your business’ growth potential can be detrimental to the business.

Your Business Plan Matters Big Time

It does not matter how experienced your management team is when your business plan is weak. When you ask for a loan from lenders, they are trying to find reasons to forward you the desired loan. They want to be sure that the loan they forward is returned in time and according to the terms and conditions set at the time of loaning. Lenders will seldom gauge the potential of your business to return the loan based on what you speak. What they want to see is a solid business plan and that’s why you need to have an impressive one. A strong business plan will consist of the following and some more.

  • The company description
  • Management role and experience
  • The product description
  • Strategy for marketing
  • Financial projections
  • An executive summary
  • Documented cash flow

Keep in mind that banks often look at the cash flow in the documented form, and their scrutiny is not limited to what your projections are for the future but more importantly how you have managed things in the past. They will look at your company’s cash flow records for past couple of years to see if you should be given the loan you are asking for. So, keep your business plan in mind and make sure you have worked on every aspect of it to present something impressive to the investors.

Your Loan Options Are Many

Sometimes, you have a solid business plan and everything else is in place, but your understanding of loan options is not at its best. Many small business owners live with the impression that the only institution available to them for obtaining a loan is a bank. That’s far from truth because there are dozens of other ways to obtain the loan or investment for your startups that’s much easier to manage than a bank loan. Some of the options available to you include SBA loans from the government, invoice financing, business equipment financing loans, etc. If you are just a startup and none of those options seem viable to you, there is online fundraising. Online fundraising has become quite a popular method of getting investments for your startup from individuals who trust in your idea and concept of the business using websites like Funded.com.

The Right People Can Make the Difference

Delegating responsibilities to the right people is an art and skill that not many business owners have. Oftentimes, small business owners rely too much on their own skills and are scared to trust any other person to do things for them. This can be a grave mistake because you cannot be the jack and master of all the trades at the same time. For example, you might be great at crunching numbers and making accurate projections for the business but not very great at sales and pitching ideas. If you have to pitch your business idea, its marketability and scope to the investors, choose the person who can best present it. Despite your great business plan, you will fail to obtain a loan because of your nervousness and lack of confidence when it comes to acting like a clever salesperson.

You have to bear in mind that investors are not investing only in your business, they are also investing in you. It is very important for them to like your personality to invest in your project. Appearing unprepared or nervous in front of them will send an impression that you are not fit to lead the project, your decision making is faulty and that you cannot create strong teams.

A Well-prepared Presentation Can Win Hearts

It does not matter who is giving the presentation when the content is boring and does not address the points that investors are most curious to know. First, get your numbers straight and bring them into the presentation at the right points. Be the investor in your mind and think of the questions you would ask if someone presented the same product/service to you. Have your accountant, advisor and business lawyer by your side when preparing the presentation. You don’t want to give wrong figures during the presentation and fall for a bad deal at the end of it. The most important thing is to explain your business idea as clearly as possible. Many times, the presentations are so all-over-the-place that investors can’t make heads and tails of it. If they don’t understand your business, they will never invest.

So, bear in mind that obtaining a loan is not that big of a challenge. Most of the times, it is just some small mistakes in the areas mentioned above that become the cause of lost opportunities to get the right loans for your business. Create a solid business plan, choose the right people to represent your business and use all the options that are available to you at the right time to grow your business at the pace you want.


Who we are:  Funded.com is a platform that is A+ BBB rated over 10+ years. Access our network of Investors, get instantly matched with a Lender, or get a business plan by visiting us Funded.com

You can review our featured partners to help your success with your business or project.