One of the most important predictors of success as an investor is your asset allocation. The way you invest your money across asset classes makes a big difference in your future success. Stocks, bonds, cash, real estate, commodities, and other asset classes combine to provide you with returns. The right asset allocation can mean the difference between success – and big losses.
As you decide how to allocate your investment funds amongst asset classes, it helps to keep a few things in mind. Here are some items to consider as you determine your asset allocation:
- Risk tolerance: Your first move is to decide on your risk tolerance. You need to think about how much risk your portfolio can handle, as well as what sort of emotional risk tolerance you have. The higher your risk tolerance, the more risky assets you can include in your portfolio. A lower risk tolerance requires that you choose less risky assets for your portfolio. If this is something you don’t feel qualified to tackle on your own considering talking to a qualified wealth management advisor.
- Needed returns: Another consideration is needed returns. Some asset classes tend to offer the potential for higher returns in the long term. Stocks are thought to offer higher returns than cash or bonds in the long run. If you need to boost your portfolio growth, stocks are often thought of the way to do it.
- Changing life milestones: Asset allocation isn’t static. It should change. As you reach different life milestones, your investing and financial needs change. Your risk tolerance also changes as you go through life. As you shift from an interest to growth to an interest in income, your asset allocation is likely to change. Make sure to evaluate your needs periodically and re-balance your portfolio.
Asset Allocation and Dividend Investing
It is worth noting that you can still use asset allocation principles when you are engaged in dividend investing. Indeed, there are income funds that pay dividends and include a variety of bonds as well as dividend paying stocks. You can add diversity to your income portfolio with the help of REITs, which can help you add real estate to your portfolio while providing you with dividends.
Before you consider that a predominant focus on dividends precludes a diverse asset allocation, it’s important to consider your options. There are ways to use principles of sound asset allocation to your advantage, even if you prefer high yield stocks. As you prepare for the future, don’t forget to consider asset allocation as part of your plan.