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Understanding Asset Allocation Theory

by gbaf

In economic terms, an asset is any resource with concrete physical value that either an individual firm, or nation possesses or controls with the hope that it will give a future surplus value. With increasing complexity in our day-to-day lives, assets are becoming harder to distinguish from liabilities. Both have a claim on our lives but only one can reap the rewards tomorrow. Asset protection strategies have been developed over time to help families and individuals to ensure their interests are protected in the face of unexpected events. For businesses, assets represent future growth opportunities.

Proper asset management is essential for corporations to remain competitive and viable. The best technique for asset management is one that balances future requirements against present availability. A firm is said to be “efficient” when its asset management policies produce the greatest available value at the lowest total cost over the shortest period of time.

There are four basic types of assets: fixed, short-term, enduring, and variable. Fixed assets are those that cannot be easily changed without significant negative cost. Examples of fixed assets are patents, bonds, and stocks. Short-term assets are those with a limited time duration such as loans, leases, and securities. Enduring assets, on the other hand, are those that have a definite date of return such as foreign currency, gold, bullion, and stock indexes.

In the realm of investing, asset allocation is the process of investing money according to expected returns and interest rates. The concept of asset allocation was made popular in the 1950s by the economists Kenneth Rogoff and Robert Kaplan. They conceptualized asset allocation as a way of creating wealth that would more or less level off as the years went by. This concept has since become a major influence in how many people approach the subject of investing for a living. The most common method of implementing the concept of asset allocation is through diversification of portfolios or putting all of one’s eggs in one basket to maximize returns.

Diversification of an asset portfolio is achieved by spreading the risk of loss from one asset class to another. Typically, when allocating your assets, you will want to invest in several primary asset classes that will generate cash and future profit. However, if your assets only earn interest and not profit, it may not be feasible to mix primary assets into secondary ones.

One way to disperse your investing portfolio is through the use of equity and derivatives. You can diversify your asset allocation by using these two types of investing strategies. An equity strategy will place a greater emphasis on the purchase of low risk, intrinsically good value investments like common stocks and bonds while minimizing the losses in other, more risky investment vehicles.

Another way to disperse your investing portfolio is through the use of derivatives. A derivative is a financial tool that allows you to borrow money at a pre-determined rate and repay it when your asset price rises. Diversification of assets through the use of derivatives is another way to ensure that all of your asset classes are gaining positive returns. When developing your asset management plan, you should also consider whether your planned changes to asset management would have an effect on your taxable income.

Finally, it is important to determine whether the sale of all or a portion of your assets will be beneficial to you or not. For example, if you are planning on making an investment in raw materials and you plan on selling them in order to make the capital part-time or full time, then it is likely that you will incur expenses in order to obtain these raw materials, such as rent and payroll. However, if you were to acquire equipment that you can sell, you would be incurring capital gains that can potentially be offset by dividends paid to you on your stock ownership in that equipment. Therefore, it is important to carefully consider the reasons for purchasing and selling assets in order to make the best decision regarding their sale. Through proper asset allocation and management, you can ensure that your economic resources are used in the most productive manner possible.


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