What You Need to Know About Asset Allocation

To many people, investing means giving a broker the green light to buy a certain share or stock. But buying share or stock – or any other specific investment vehicle – is really one of the last steps in investing. And – believe it or not- it is among the least important ones.

Before you invest – and long before you think about which product you want to buy- you much decide how to allocate your resources among the different categories of investment.

Why allocate?
Why is allocation so important? Here's the reason. More that 94% of the total return on your investment cedis or dollars is a result of the way you allocate your resources. Only 6% depends on the specific assets you buy.

You can see why asset allocation is the single most important aspect of a successful investment strategy. And asset allocation is really a simple concept. It just refers to the way you divide your investment cedis or dollars among different types of investment vehicles – cash, bonds, shares, real estates and so on.

Before I show you how asset allocation can work for you, I'm going to spend some time explaining the issues involved in assess allocation. I guarantee you, it will be time well spent.

Where Does the Money Go?
Lets' assume that you've managed to accumulate Ghc10,000 or $ 10,000 in savings. Naturally you want to invest it to your best advantage.
So you do your homework. You quiz your friends, your co-workers, your sister-in-law, even the guy you meet on the bus.
They all have advice (as usual) and it comes down to these choices:
· Leave the money in the bank
· Buy shares in a small high-technology or financial company
· Buy shares in a well-known, diversified multinational company
· Buy corporate bond
· Buy government treasury bills
· Invest in real-estate limited partnership
· Buy shares in a mutual fund

So what do you do? One of them? All of them? Some combination? Which combination? If you hesitate before answering, you're on the right track.

The fact is you can't make a sensible choice without more information. And you need to evaluate and consider the following:
· The relationship of risk and return
· The forms of returns
· The relationship of the form of return to risk
· The types of risk
· The need for diversification

My subsequent posts will run through each of these issues.


Email me with any queries or comments.