Image by: Daniel Scalley
By Michael Sterling
An asset allocation strategy is one of the most important things you can have. Not only will it help you get closer to your investment goals, but it plays a major role in determining the outcome of your returns. Everyone has something different to offer, and as an investor, you need an original approach to reap all the benefits you can.
Stocks, bonds, and the money market are constantly fluctuating. The smartest way of growing your wealth isn’t to throw money in the pot like it’s a game of Blackjack, but to organize your portfolio with a smart investment plan. Here are a few strategies proven to help you reach your goals:
#1) The Balance Strategy
This is one strategy I have seen be tremendously successful for investors, but only the ones who do it correctly. The balance strategy requires the investor to have a permanent division set of assets, for example 40% stocks, 40% bonds, and 20% in the money market (bills, notes, funds). This division doesn’t change once it’s set.
When one asset begins to decline in value, the investor would purchase more of that particular asset. When the value increases again, he would then sell it, balancing him back to the “neutral” set, and with a little extra money in his pocket for other investments.
If you’re not too familiar with the market or are too busy to pay attention, this strategy is a great option because it eases your mind about where your money is. Before you get started, research the returns each of your assets bring in per year. By setting the assets accordingly, you are likely to see a consistent return.
#2) Adjust As You Go Strategy
As the market rises and falls, a smart investor can adjust their assets to meet its needs. But this takes tremendous time, patience, and instinct. This strategy requires you to sell your assets which are declining and buy new assets which are increasing.
If you have a feel for the market and are excellent at spotting how it will react to whatever situation the world’s economy is in, this might be the most interactive and hands-on approach for you. Unlike the Balance Strategy, this doesn’t require you to “hold” one type of set, but constantly change it up.
In order for this to succeed, you need to read financial reports, the NYSE, and other daily outlets to get an idea of the life of the market. The returns are likely to be substantial with this approach since the market will become second nature, and soon you will spot things before they arise.
#3) Long, Short, Long Strategy
It’s always a great plan to keep your strategy focused on long term goals, but since the market is constantly changing, it is necessary to use certain assets for short term opportunities which are inevitable to arise. This not only requires you to pay attention to the market, but also demands you to have good timing.
Similar to the balance strategy, your “neutral” state would be designed to meet your long term needs. When you see an opportunity to have a fast return, use whatever asset necessary to take advantage of it. But once you’ve achieved these short-term profits, the assets must return back to the original long term set up.
*Tip: Be wise with your short term opportunities. It’s important to recognize when it has run its course. When your profit begins to decrease, cash out and return to your long term strategy.
#4) Risk & Reward Strategy
This strategy requires you to consider the expectations from the capital market, the risk you will ultimately face in respect to your annual income and other assets, and then build a set strategy according to these factors.
This might seem like an obvious strategy, but what many people fail to see is the likely tendency to not put your money where you need to out of fear. Making decisions based on risk factors, however smart, might prevent you from seeing opportunities when they arise.
Instead, I recommend you implement this strategy on a percentage scale, similar to the Balance Strategy mentioned above. Investigate your finances. Once you have a set idea of where your money can go, divide your assets into percentages, i.e. 20% goes to stocks, 20% bonds, 10% real estate savings, 20% IRA account, 30% personal savings.
Once you have a setup you are comfortable with, there is no need to worry about it anymore. You’ve done the work already and all you have to do is watch the returns come in.