To arrive at a proper asset allocation while building an investment portfolio, you should always draw a holistic financial plan for yourself first.
Building a portfolio is like playing long innings in test cricket. You need to apply an asset allocation strategy over a long term period, which needs to be restructured from time to time as per your increasing age through financial planning approach.
Liabilities
Understand your liabilities, arrive at the overall needs which one has, quantify these needs as of today’s value which gives a sense of how much wealth is required to be financially independent.
Assets
Assets are described in financial planning as your holdings which can help you make wealth over a long time period. The more assets you have and the lesser the liabilities, the greater will be your net worth. So, you should keep on increasing your physical and financial asset as required in your financial plan.
Cash Flows
Liquidity is always needed and at every point in time ready cash should always be available with you even while restructuring your asset allocation during markets up and down.
Risk Profile
This looks at the behavior/ reaction of the investor which gives an idea about the risk appetite of an individual investor. It is not always equal for every men/woman to take an equal risk at a given point in time and at the same age.
Conclusion
Thus, through asset allocation strategy applying proper financial planning approach, it becomes easy for investors to make their investments in the right direction by understanding their liabilities, assessing their risk profiling and then choosing funds to go ahead with making an investment for long term as per the desired financial goal.
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