What is Asset Allocation & Why Is It Important

What is Asset Allocation & Why Is It Important

You may have heard the words “asset allocation” or “diversification” - what the hell does that mean and why should I know about it?

You can think of asset allocation and diversification like a well stocked bar. In order to have happy drinkers, you have to have a mixed stock of everything in your bar - wine, beer, varieties of vodka, gin, tequila, whiskey, rum, bourbon… you get the point! It’s the same thing with your money. Here’s the breakdown: asset = your money, allocation = how you split it up, diversification = don’t have all your eggs in one basket. In order to protect yourself from economic events and specific industry trends, it’s a good idea to invest your money in different things - from investments in stocks, real estate, businesses, and high-yield savings accounts.

You want your money to be able to grow with the economy, beat inflation, and find ways to make your money work for you. There are certainly more investment types (commodities, bonds, other alternative investments) but let’s start with some of the basics:

  • An equity investment allows you to invest in companies or sectors that you believe are strong companies and/or sectors and want your money to grow with that.

  • Real estate is a tangible investment (although you have the opportunity to invest in real estate without physically owning a property, but I’ll talk about more in another post). It can provide value if that proper appreciates or increases in value and it can also provide you income value if you rent or lease out to another party and are able to charge more than what you owe on it.

  • Cash - it’s also smart to keep some of your money in cash. If it’s not money you need for day to day purchases, I would suggest opening a high-yield savings account so you can earn a little more interest than a regular savings account.

When you have your money in different things, you are able to weather the ups and downs that happen in the economy. And with the right mix, you can maximize your gains while managing your risk.

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How to Build an Investment Portfolio

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