Of investment goals and asset allocation

Of investment goals and asset allocation

Successful investing is all about having the right strategy in place. The objectives of investment can be many ranging from buying a small appliance in the near future to a house or even putting aside funds for your child’s education. So before you lay down a course map you must first ask yourself what your goal is and how you plan to achieve it. Having laid down your goal the chances of achieving that goal to great extent depends on the right mix of investments. Since investing can bring in rewards and risks, you need to evaluate several factors to determine how aggressive or conservative you want to be with your money.

Most investors tend to be cautious when investing for the future and put most of their money in a portfolio of low-risk investments such as bonds, money market funds for bank deposits. While such investments can offer regular payments and help preserve your principal, they generally don't protect savings against the effects of inflation or provide the growth you need to achieve your investment goals.

To overcome these hurdles the ideal springboards are stocks. Stocks have the potential to increase in value at a much faster rate as compared to fixed income securities and also outpace inflation over the long term.

Though stocks can be more volatile in the short-term, their volatility has tended to even out over time. Hence the longer you have to invest, the greater your use of stocks generally can be.

Depending on the risk one is willing to take and the investment horizon, there are five broad strategies one can follow. However, one has to keep in mind that these are sample allocations and not definitive. Rather, they're intended to give you a point of reference when considering your own unique situation.

To begin with the investor largely has a choice of three asset classes which he can allocate.

Stocks – Can be volatile in the short-term, but offer the best opportunity for long-term growth.

Bonds – Compared to stocks bonds are less volatile and generally provide stable income. However, bonds provide less long-term return potential than stocks.

Cash assets – Provide income with little or no volatility of principal, but offer very limited growth opportunity long-term.

The five broad strategies are:

Very Conservative

This approach may be appropriate for investors who emphasise stability and current income and require very little growth potential. The allocation in this strategy would tilt to a great deal towards bonds and cash, which will make up 80 per cent of the money with the rest being invested in equities.

Conservative

Conservative investors are those who are willing to accept only modest volatility and who seek only limited exposure to growth. They are income oriented. To achieve this the ideal mix would be stocks 40 per cent, bonds 35 per cent and cash 25 per cent.

Moderate

Investors under this segment do the balancing act. They seek to balance moderate growth potential with lower-volatility income investments. Here investment would skew in favour of stocks, which would make up 60 per cent of the portfolio with bonds accounting for 25 per cent and cash 15 per cent.

Aggressive

Aggressive investor looks for high return and is willing to bear the high volatility that goes with it. These investors are growth-oriented who want to temper their exposure to stocks with a moderate position in less volatile securities. Here 80 per cent of the money is invested in stocks with bonds accounting for 15 per cent and cash 5 per cent.

Very aggressive

Investors who are willing to assume short-term volatility to pursue maximum growth over time. These investors invest 90 per cent in stocks with a marginal 5 per cent in bonds and cash each.

While these are broad outlines. When comparing asset allocation strategies to your personal financial situation, you should consider your investment time frame and your risk tolerance level. The more aggressive approaches are generally more appropriate for investors who can afford the greater risks involved, either because they have sufficient assets to weather short-term volatility, or because they have a long time horizon that allows them to look past occasional downturns.

Happy Investing