Candlestick Trading Blog
February 18, 2008
Portfolio
Portfolio – Optimal Asset Allocation So you think you’re either ready to create or reevaluate your portfolio? Think skittles. Yes, skittles that chewy candy that you either used to eat as a child, or those little bits of candy you find scattered around your house and in your car if you have children. In any event, when you build it, it should resemble a rainbow of colors, or in financial terms, it should contain an array of asset classes so that it is well diversified. Portfolio diversification is a widely universal concept that is accepted by most investors and a concept that earned Markowitz the Nobel Prize. He developed this theory which sought to prove that a diversified or “optimal” portfolio could be practical. The techniques for measuring the level of risk associated with various assets and his methods for mixing assets became routine investment procedures. His concept means to mix assets so as to maximize return and minimize investment risk. You must spread your risk by investing in a mixture of stocks, bonds, mutual funds, and other investment vehicles. Your portfolio should be well-balanced and it should contain investments with varying levels of risk in the event one of the investment holdings declines significantly. Asset allocation will assist you in getting where you need to be. This idea of asset allocation is literally that. You decide how your investment dollars should be allocated across classes such as stocks and bonds, mutual fund investing, options trading, gold investing, hedge fund investing, etc. The basic principle underlying asset allocation is that different classes of investments have shown different rates of return on investment and levels of price volatility over time. The last think you want to do is to “put all of your eggs in one basket” and lose everything. Some investors opt to perform portfolio management via the use of a portfolio manager. If this is the route you would like to go, keep in mind a few things. First of all, you must be sure that the manager you chose understands the level of risk that you are comfortable with. You must be on the same page when it comes to this. The investment professional should ask you questions in order to gauge this. Then it is their job to ensure that they tailor your risk level towards building a strong portfolio for you. This position manages groups ranging from small independent funds to large asset management institutions. It also includes the selection of what assets to actually purchase, how many to purchase, when to purchase them, and what assets to divest in. Performance measurement is crucial to this process and most typically includes the expected return and the risk associated with the return. Regarding diversification, it is important to note that it almost naturally occurs through investing in mutual funds. Most mutual funds invest in one dozen to hundreds of securities. When an investor purchases shares in a mutual fund it reduces the exposure to any one security and in addition you get the advantage of a money manager making investment decisions on your behalf. There are different types of mutual funds to choose from ranging from mid cap funds, small cap funds, blue chip funds and many more. They are categorized by the way they yield return to investors and can be fixed income, growth, global, core, mixed equity and sector. The investment options discussed above are important but will only get you halfway there. You can also look to invest in real estate, money market accounts, retirement accounts, and other investment vehicles. The possibilities are endless, but with the right amount of knowledge, research, and guidance you can build a collection of investments that will make you very financially comfortable. Online Stock Market Reviews presented live via the internet by Stephen Bigalow |
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