Surviving the Risks through Asset Allocation
Are you someone who has been investing in the stock market for a long time? You probably have done this. If you are new, you will do it in the future. Imagine that you have analyzed your portfolio for the last ten years. The chart formations you draw will probably look like the moves from a line dance and not an ascent of a great mountain; it is probably a series of ups and downs where the downs routinely offset the ups. If you looked back, it is likely that the only thing that saved your portfolio was something called asset allocation.
Asset allocation is a method of portfolio diversification that hopefully is a part of your stock trading system. Smart investors never depend on only one stock, just as they rarely put their holdings in one sector of the market. Instead, they spread, or “allocate”, assets across a diversified portfolio of big and small stocks, as well as bonds and money-market investments.
Why do investors need to allocate assets? Look at your hypothetical chart again. The first five years, you enjoy a nice bull run through the late 90’s; your stock portfolio is fat because of that period. Starting just before the terrorist attacks of 2001, the market began to fall and fall it did. First, because the economy had begun to falter at the end of the Clinton administration and the stock market crashed to the ground shortly after the towers of the World Trade Center.
If asset allocation is important now, its importance was “life or death” in the past. Before this century, there were other times of bad Wall Street news, with periods of bear markets. In fact, between 1966 and 1982, five bear markets were recorded. Blue Chip stocks rose and fell with each cycle but stayed in the same price range for most of the 70’s. Because the economy had a combination of inflation and recession, interest rates rose to incredible levels, crushing the stability of the bond market. The very basis of hedge funds, the stable Blue Chip stocks, and the dependable bond market wasn’t there and the market suffered with only 20% of Americans owning stock, down from its earlier high of over 50%. Asset allocation had to depend on small-cap stocks, which soared to new heights in the late 70’s.
How does this apply to asset allocation and how does it apply today? Asset allocation is relevant because, while investors struggled with traditional methods of investing, the small companies, especially in the computer business, carried the day. With proper stock analysis, you can stand by your stock trading plan and find the companies that are performing well. Asset allocation shows that by having a proper mix of companies in various stock sectors, an investor can weather almost any economic storm.
Greed and fear can affect almost any investor if they are given the chance. For the investors who stick to solid stock trading basics and do their fundamental and technical analysis, it is possible to survive the risks of the stock market through asset allocation.
0 Comments:
Post a Comment
<< Blog Home