To live a comfortable life you need money and you have to make financial decisions regarding spending, savings, and investment. But you can’t predict the market and infer how it will perform tomorrow. There is always uncertainty in the market. The solution to this problem is asset allocation.
Tony Robbins once said, “The quality of your life is in direct proportion to the amount of uncertainty you can comfortably deal with.”
Yes. There is always uncertainty in every field of your life. Whatever you want in life, there is a path to get there. Some decisions will be outside of your comfort zone and give rise to uncomfortable emotions.
What is asset allocation?
Asset allocation is the practice of distributing your money across different asset classes such as equity, debt, etc. It is an investment strategy that will balance your portfolio’s risk and reward.
Why is it important?
Reduces your risk on investment
Risk and return from an investment have a positive relationship. If you are ready to take more risks, you can reap a high return from the investment. Likewise, if you decide to avoid risk, your return will be low accordingly.
Your risk tolerance plays an important role in your chances of getting returns. You may not get sufficient rewards if you take a low risk. If your risk tolerance is high, it may lead to the erosion of a huge amount of money from you. But asset allocation exposes you to a possibility of balanced risk and return.
Keeps you disciplined
People tend to invest more when the market is good expecting the trend will go on in the future. On the other hand, if the performance of the market is bad, people tend to sell their equities.
These kinds of emotions can make a negative impact on your long-term financial interests. Asset allocation will keep you disciplined as you make investments irrespective of market performance.
Of course, you can earn better returns with the help of asset allocation by limiting the market risks. But you should not be guided by emotions while making investment decisions.
A proper asset allocation will place your investment portfolio in a better position considering the market uncertainties. This strategy will ensure that you get closer each day to achieving your financial goals and happiness.
