Asset allocation is an essential aspect of investment and plays a crucial role in determining the health of an investment. The goal behind this is reducing risks and maximising the returns. Investors usually tend to spread their assets across different types of funds depending on the market insights. Some even take the assistance of a financial planner these days. Specific factors, like the investor's risk-taking ability, objectives and time period available to obtain those goals, influence the asset allocation in any investment portfolio.
Experts have hinted that investment strategy of balancing risk against rewards is vital in today's highly volatile market. This is due to many distinct reasons. One, this helps spread the risk, which exists in the market, across many asset categories. By diluting the overall risk across these classes of assets helps an investor acquire better returns from the investment. It is quite natural for a particular type of asset to perform differently or even underperform relative to the others due to the economic circumstances. In situations like this, an investor who would have invested in a particular class of asset only would have suffered compared to the one who diversified his/her investment by asset allocation.
Second, allocating the assets can decrease the volatility of overall investment portfolio. The top-performing asset class of this year might quite easily produce unfavourable returns in the next year and vice-versa. Hence, it is vital to have a balanced asset allocation.
Third, it will provide the opportunity to have more consistent portfolio returns over the long-term. Investing in different classes of assets would in turn help maintain a well-diversified portfolio. This creates chances of a wide variety of potential sources of growth. Furthermore, a well-diversified portfolio ensures that the out-performing asset classes minimise the poor performance in the other asset classes.