The Importance of Asset Allocation
By Saghir Aslam
(It is solely to educate the Muslim community about investing and financial planning. It is hoped that the ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
The most important decision an investor can make is the decision on asset allocation- how do I allocate my portfolio among stock, bonds and cash?
The asset allocation decision should be made before any actual investment. This decision is a critical one because it’s been shown that how an investor allocates portfolio assets has a far greater impact on investment return than market timing or security selections.
Studies have shown that strategic asset can be the major determinant of how well your assets are invested in various asset classes has far more impact on overall performance over time than the decision of which individual investments to buy.
Different asset classes react differently to the same economic news. Events that super equity markets may send bond price downward. It is important, therefore, to study the correlation of asset classes in order to appropriately diversify against risk.
“…asset allocation is the overwhelmingly contributor to total returns.”
In fact, asset allocation accounted for 91.5% of total plan returns.
The lesson for investors is that more time should be spent on determining the proper portfolio allocation simply because asset allocation has greater impact on return than the actual individual investments selected or when an investor moves in or out of the market.
Although no investment strategy can guarantee success, a properly allocated portfolio is more likely to participate investment trends while at the same time reducing volatility when the investment climate changes.
Studies have shown that the asset allocation policy accounts for more than 90 percent of a portfolio’s performance.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr. Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, or does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr. Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr. Aslam does not have anything for sale.)