Asset allocation is an important process for any individual or business. It involves the allocation of funds within a portfolio to meet various risk, return and time parameters. Asset allocation is
often used as a framework for investment planning. While some professionals use it as a way to create investment strategies, many others use it as a way to develop individual portfolios. In any
case, it is important for managers to understand how asset allocation works in order to make investment decisions that are consistent with both risk and return.
Asset allocation involves the decision of which asset class should be held by a manager. An investment manager chooses the asset allocation based upon the type of risk he or she is
looking at. A fund manager who invests his money in a wide variety of different assets can reduce risk by having multiple categories of assets held. In fact, the more categories you have
available for investment, the less risk you will face. Asset allocation also involves the decision of which asset class should be held by a manager in relation to another category. The investor
should determine how the different asset classes affect the investment objective of the portfolio. The process of asset allocation involves three steps: risk, return and time. Risk is the factor that
can create a loss for a fund manager.
An investment manager’s decision of whether to use asset allocation involves factors such as: the size of his or her portfolio, the size of his or her account, the amount of leverage that is
available in the portfolio, the risks associated with his or her investment choices, and the time horizon over which he or she is seeking to make investment decisions. There are several
different methods of asset allocation that a manager can use. The most common method is simply to allocate a particular percentage of the total value of his or her account. Some other
The second step in the process of asset allocation involves the decision of which asset class should be held by the manager. For instance, if a manager is an equity investor, he or she may
choose to use funds that are directly related to equities. Or, if a manager is an income investor, he or she may choose to hold funds that are related to fixed income. This decision must be
made carefully and a portfolio manager must consider the costs associated with holding allocating assets to specific categories.
The third step in the process of asset allocation involves the allocation of assets within the portfolio. This is where the risk is taken into account. Each asset class is then held within the
same account with a varying degree of exposure to the risk involved. There are two types of asset allocation; they are called active and passive. Active asset
allocation includes the allocation, or use of funds in the market, while passive allocation involves holding funds in an account that have not been purchased. While passive asset allocation uses
securities that have not been purchased. Another type of asset allocation involves use of a single investment manager and holds all of a fund’s assets in a single account. In general, this type of portfolio is considered as the most conservative and therefore is the safest for the investor because the risk of loss is less. The fourth step in the process of asset allocation involves choosing a specific asset allocation method. The investment manager will determine what asset allocation methods to use based on his or her needs, the amount of risk, and the costs associated with holding these particular assets. Asset allocation can be either passive dynamic, or dynamic. The fifth step in the process of asset allocation involves the use of funds. There are various
methods of purchasing and selling the funds within the portfolio, including: buying directly from the manager, selling securities directly from an exchange traded fund (ETF), or using a
stockbroker to sell securities. Asset allocation can also involve borrowing funds from a bank, mutual fund, or selling securities from a credit union, a private investor, or a brokerage firm that
specializes in investment management of mutual funds.
The sixth step in the process of asset allocation involves the use of security. The manager will determine which securities will hold the asset allocation and will purchase them from an
investment bank, investment trust, a broker, or from another individual or entity. The securities used for this purpose may be securities issued by banks, corporations, insurance companies, or
private investors. When security is purchased from an investment bank, it is referred to as ‘aggregate security’ and securities used in this method may hold securities in a single account.