By AdaPia d'Errico Modern Portfolio Theory is based on the idea that certain types of investment risk can be mitigated through a strategic pattern of diversification and asset allocation. Diversification is important because it spreads risk across multiple types of investments within a single portfolio. Markets and asset classes will have good and bad years.
How did you learn them? Through ordinary, real-life experiences that have nothing to do with the stock market. For example, have you ever noticed that street vendors often sell seemingly unrelated products - such as umbrellas and sunglasses?
Initially, that may seem odd. After all, when would a person buy both items at the same time? Probably never - and that's the point.
Street vendors know that when it's raining, it's easier to sell umbrellas but harder to sell sunglasses. And when it's sunny, the reverse is true. By selling both items- in other words, by diversifying the product line - the vendor can reduce the risk of losing money on any given day.
If that makes sense, you've got a great start on understanding asset allocation and diversification.
This publication will cover those topics more fully and will also discuss the importance of rebalancing from time to time. Let's begin by looking at asset allocation. Asset Allocation Asset allocation involves dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash.
The process of determining which mix of assets to hold in your portfolio is a very personal one. The asset allocation that works best for you at any given point in your life will depend largely on your time horizon and your ability to tolerate risk.
Time Horizon - Your time horizon is the expected number of months, years, or decades you will be investing to achieve a particular financial goal. An investor with a longer time horizon may feel more comfortable taking on a riskier, or more volatile, investment because he or she can wait out slow economic cycles and the inevitable ups and downs of our markets.
By contrast, an investor saving up for a teenager's college education would likely take on less risk because he or she has a shorter time horizon.
Risk Tolerance - Risk tolerance is your ability and willingness to lose some or all of your original investment in exchange for greater potential returns. An aggressive investor, or one with a high-risk tolerance, is more likely to risk losing money in order to get better results.
A conservative investor, or one with a low-risk tolerance, tends to favor investments that will preserve his or her original investment. In the words of the famous saying, conservative investors keep a "bird in the hand," while aggressive investors seek "two in the bush.
You've probably heard the phrase "no pain, no gain" - those words come close to summing up the relationship between risk and reward. Don't let anyone tell you otherwise: All investments involve some degree of risk.
If you intend to purchases securities - such as stocks, bonds, or mutual funds - it's important that you understand before you invest that you could lose some or all of your money. The reward for taking on risk is the potential for a greater investment return.
If you have a financial goal with a long time horizon, you are likely to make more money by carefully investing in asset categories with greater risk, like stocks or bonds, rather than restricting your investments to assets with less risk, like cash equivalents.– Optimal real estate‐only portfolios are constructed using total returns, income returns and appreciation returns for office and retail real estate in ten cities within Ireland and the UK.
The analysis uses IPD data for the period to Institutional real estate portfolio diversification in Ireland and the UK This paper aims to examine the potential diversification of private real estate investments using returns data for major regional centres in Ireland and the UK.
But investors continue to sit on the sidelines, still spooked by the tumble in real estate values during the financial crisis and failing to realize that prices have not only fully recovered. But other asset categories - including real estate, precious metals and other commodities, and private equity - also exist, and some investors may include these asset categories within a portfolio.
Investments in these asset categories typically have category-specific risks. Real estate: Alternative no more Is the current market environment • Significant portfolio diversification benefits.
• Inflation sensitivity—without compromising real returns (as investors are facing in their Big Two Traditional portfolios.
Global private real estate offers a potential solution. The diversification benefits of direct and indirect real estate investments are well known, and diversification's role in institutional portfolios has been investigated extensively.