Asset Allocation: A Foundation for Your Investments
By Saghir Aslam
(The following information is provided 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)
Forget baseball, basketball, football, and other sports and events: these days the great American pastime is investing. During weddings, Ameen’s, Aqiqa’s, and our other social get togethers; our Brothers are talking about investing. Sixty percent of all U.S. households now own stock directly or through mutual funds, trusts, and retirement accounts. This number in 1960 was under ten percent. Avid investing fans that we are, we can’t seem to get enough information from enough sources. Yet a recent survey found that nearly a third of investors rely on friends and family for investing advice
Investing is not a game or a contest. It can be a means to reach your financial goals. That could be a problem. Would you rely on friends and family to diagnose a medical problem, or to build your house? With all the attention paid to the stock market, and all the well-meaning advice we receive, it’s easy to lose sight of why we invest in the first place.
Investing is not a game or contest. It can be a means to reach your financial goals. If you intend to reach your goals, you need to approach investing with a well constructed plan. You need to avoid jumping from one “hot” mutual fund to another. One of the best planning tools is called asset allocation.
Spread the Wealth, Reduce the Risk
Asset allocation is a process for building an investment portfolio based on your financial goals and your tolerance for risk. It can help you create a solid, steady, long-term portfolio, while reducing the impact of market volatility on your holdings.
The basic premise of asset allocation is to diversify your holdings among the three main asset classes – stocks, real estate and cash. By doing so, you may increase your chances of getting good results, because different parts of the market do well at different times, for different reasons and for unpredictable amounts of time. You also may decrease your risk, essentially because all the asset classes are unlikely to decline at the same time. The fancy term for this is low-correlation of asset classes. In plainer terms: asset allocation means not putting all your eggs in one basket.
The finer points of asset allocation stem from the work of Nobel Prize winning economists who measured the relationship of investment risk to return. Most importantly, their research showed that a well-diversified portfolio could accommodate some higher risk investments – with potentially increased return – without necessarily increasing the overall portfolio’s risk level.
The economists’ work established the “efficient frontier” concept. Simply put, this states that for any particular level of risk an investor might accept, there are many possible portfolios of stocks, real estate and other investments. However, only one portfolio would have the best-expected rate of return for that level of risk. When viewed collectively, these “optional” portfolios – matching bests possible return with each degree of risk.
(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, nor 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.)