Are you the type of investor who is very likely to put all your eggs in one basket? While I don’t deny that by focusing all your ringgit on one single counter can help you maximize your return, but by betting your entire hand on one single counter also puts you in a maximum risk situation. Hence, applying the principles of asset allocation can help you reduce your risk while ensuring that you also make a nice profit along the way.
Here’s what Steve Pavlina has got to say about Asset Allocation (there’s an interesting example in which he compared 2 portfolios, one with asset allocation, the other without).
Asset allocation refers to how you allocate the money you have available to invest. What percentage of your money goes into your secure, moderate growth, and aggressive growth baskets?
You have many options for where to invest your money, and every option has a different risk/reward ratio. You can put all your money in the high risk/reward basket, such as aggressive growth stocks, and you may enjoy great gains, but you’ll also suffer huge losses when things go badly. On the other hand, you can put all your money in the low risk/reward basket and keep your assets secure, but then your gains will be very modest. If your gains are taxable, you need to make about 7% just to stay even, since you have to cover inflation + taxes (based on typical USA figures).
He also mentioned that by rebalancing your investment portfolios from time to time, it’s a very effective measures of profit-taking (locking-in the gains you’ve made so far) and to re-evaluate the risk elements before you invest again with the gains you’ve made.
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