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Home > DeRamus Wealth Asset AllocationWhat is diversification and or asset allocation?
The credo for diversification is ‘never put all your eggs in one basket’. Diversification is the term used to describe the practice of allocating (i.e. carving or slicing up) your investment monies among investments that respond differently to varying market conditions. Asset allocation refers to the amount of size of each portion or slice of the investment relative to the other portions. As an illustration, an example allocation for a conservative investor’s portfolio might be as follows: 10% cash, 70% high-quality fixed income, and 20% dividend paying equities.
There are two main reasons that diversification and asset allocation are so important. First, it's essential to reduce the possibility that you will suffer from an unrecoverable financial loss should the capital markets turn against you. For example, if a person did not appropriately engage in diversification and asset allocation and had the majority of their investments in a single investment, and that investment dropped substantially in price, then the investor would subsequently experience an equally substantial drop in the value of their portfolio. In this case, failing to diversify could lead to an insurmountable loss in the value of the investment.
Second, the more effectively a person diversifies, the more likely they will be to find that one of their investments has paid off. For example, if there is a rise in a particular capital market and the investor has allocated their assets effectively, then it is more likely that one or more of their investments will benefit from the rise, and thus realize an increase in the value of their investments. The opposite is also true. In the event there is a decline in a particular capital market and the investor has allocated effectively, then it is more likely that the investor will not suffer a material loss in the value of the portfolio.
How can a financial planner help with diversification and asset allocation?
Each situation is different, and each individual or business should have their own unique asset allocation policy. DeRamus Wealth Management can examine your current investments, your investment objectives, your concerns and situation to find the right asset allocation policy for you. There is no one approach that is best for everyone, which is why it's so important to have a financial advisor assess your unique situation.
What is an asset allocation approach based on?
While every asset allocation will be personalized to the individual or business, there are a few factors that are heavily weighed in.
Time Horizon
Put simply, a time horizon is the number of years that your money can remain invested before you begin withdrawing an ongoing income. Someone #near# who is investing for a longer period of time may be able to tolerate a slightly riskier asset allocation in investments that pay little or no current income, but are designed to appreciate in value over time. On the other hand, a retiree who requires an ongoing income from their investments would likely need a less risky asset allocation in investments that are designed to pay income now as opposed to being designed for appreciation.
Risk Tolerance
Each company or individual must decide how much risk they are willing to take on. In most cases, the greater the risk, the greater the potential reward. However, the opposite is also true – the greater the risk, the greater the potential loss. An aggressive investor will often opt for an asset allocation approach based on an opportunistic and optimistic attitude about the future. A conservative investor on the other hand will often choose an asset allocation policy based more on certainty and preserving their original investment.
What are the investment choices?
There are a literally thousands of investment choices and dozens of distinctly different capital markets. The more commonly known markets include fixed income, public equities, cash, and real estate.
However, there are a also a number of lesser known markets, which includes commodities, currencies, derivatives, private equities, managed futures, insurance contracts, and hedge funds.
Why should I choose DeRamus Wealth Management to help with my plan for diversification?
At DeRamus Wealth Management, we focus on understanding the unique circumstances and individual needs of each our clients before we suggest a approach that we feel would be the most suitable.
We are a highly experienced Wealth Management firm, founded by a CEO with a diverse background in real estate, financial services and business. Our integrity, personal approach, and diverse background make us your premier choice as you look for a diversification and asset allocation plan.