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ASSET ALLOCATION: STRATEGY

Updated on May 08, 2011

ASSET ALLOCATION- MEANING AND TYPES

Assets allocation simply means the scientific study of the best and optimal way of distributing funds or cash among assets in a portfolio- asset management. This portfolio can be of any type (class) ranging from shares, real estate, commodities, to even venture capital choices.

The individual responsible for managing this asset allocation process can be called any of the following names: portfolio manager, investment manager, fund manager or financial analyst. It all depends on the choice of word of the individual.

Portfolios can further be subdivided by the investment manager for proper accountability and manageability. Stocks/ shares for instance can be subdivided into; penny stocks, blue-chips, local/domestic stocks, international stocks, large stocks, medium stocks or even small stocks. Real estate portfolio can be subdivided into; urban area buildings, rural area buildings, old buildings, new buildings, modern buildings, cheap buildings, expensive buildings, etc

TYPES OF ASSETS MANAGEMENT STYLE (ASSET ALLOCATION)

We basically have two types of asset allocation namely: strategic asset allocation and tactical asset allocation.

STRATEGIC ASSET ALLOCATION

Strategic asset allocation is the process of devising a fund sharing formula among assets in your portfolio based on long term factors to suit your desired and special needs.

TACTICAL ASSET ALLOCATION

Tactical asset allocation is the distribution of funds among competing asset based on short term variables. This is to say that tactical asset allocation technique make more use of derivatives and is more active.

BENEFITS OF USING ASSET ALLOCATION

Reduction of risk: asset allocation make use of derivatives- a derivative is a contract between two parties-a buying party and a selling party- providing a payoff from one party to the other determined by the price of an asset, an exchange rate, a commodity price, or an interest rate. Options and futures are examples of derivatives. Risks that are peculiar to an asset- i.e. unsystematic risk can be effectively reduced by moving funds between assets at will. This is made possible by the efficient use of stock index and futures bonds.

Efficient: tactical asset allocation strategy allows investment managers to moved funds between two or more instruments within a short term, thereby giving room for benefits to be made from market timing of securities or any other asset.

Cheap: because of the involvement of synthetic cash/ money is the movement of funds between assets, transaction costs are usually minimal and negligible. This is however relative, what I see as being inexpensive may be seen as expensive.

Asset allocation is one of such strategy that most successful managers have used in the past to create wealth. This is to say that asset allocation technique can be said to be a wealth management tool that all wealth managers like fund managers can use to create excess or at least returns for the owners of wealth.

Portfolio managers use asset allocation to move money which is a scarce resource to more profitable asset.

Common sense even play a useful role here as no sensible human being will leave his or her money tied in a lesser paying asset when he or she know of a better paying income stream. The only problem that most people have with asset allocation is that they are not close enough to the market to actively or passively move funds around; if this is the problem you are facing, feel free to engage the services of any of the asset management professionals that I mentioned at the beginning of this hub. Again, physical maintenance of our asset cannot be neglected if we are dealing with the more tangible assets like real estate.

To your successful assets allocation campaign!

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