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Types Of Risks In Investments And Asset Allocation

1133 words - 5 pages

Definition
Investor tends to make investment based on personal preferences regarding risk tolerance and investment horizon. Risk tolerance is the amount investment that the investors willing to lose for the greater expected returns. Investment horizon is the timeframe set by the investor to achieve their investment objectives. There is several investment strategies such as asset allocation that can assist investor to makes a better investment decision. This decision can cater the needs to balance the risk and return by the individual investor in which assisting them to adjust the portion of investment in each of the portfolio invested. However, a degree of risk and return might be vary ...view middle of the document...

Investment horizon and inflation The research indicates that over than 10 years the asset allocation will beating the inflation. If the investor plan to perform the asset allocation for the purpose of retirement then they need to perform it at least 10 years before their retirement before the asset can undergo a liquidity process.

Risk tolerance
Risk tolerance is the amount investment that the investors willing to lose for the greater expected returns. The amount will be different according to investor personal preferences. The risk taker will prefer a higher risk with the assumption that, higher risk will come together with the higher return. This is theoretically correct but one’s should consider that the amount of risk is appropriate with the amount of return expected. This kind of investment suits for the short term investment which allow the investor to generate higher possible income in the short run. The risk adverse, on the other hand, seek for a low risk of investment which is more secure. This is usually applied for a long term investment.

Planning Asset Allocation
Asset inventory (Phase 1)
It is a process where investor need to rebalance their investment portfolio. This includes the evaluation and reallocation of the assets according to their risk tolerance. Effective asset inventory will support the efficiency of the diversification which will reduce a huge exposure towards the market uncertainty. Instead of putting a large portion of investment on a single industry, the investor should spread their investment to the other industry as well. Some investor tends to shift their focus only on a specific industry based on their past performance. However, there is no guarantee that the portfolio will maintain it momentum.

Basic Allocation Plan (Phase 2)
In this phase, the investor will decide on how they are going to allocate their funds on different asset classes. Asset can be divided into three class which is equities, bonds, and cash-equivalent. Among the golden rules in investment is not to put all your eggs in one basket. By mixing up the all three type of asset class, investor can benefit both in short and long run. The equities and bonds will served better for medium and long term investment and it is very useful for retirement tools. Cash-equivalent assets classes faced a huge exposure of inflation in a long run. Hence, this make it more suitable for short term...

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