What is asset allocation? What are the strategies and how to do it?
Do you know how to allocate assets? Learn how to find the best strategy for your investor profile
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Asset allocation is a strategy based on diversifying your investment portfolio. In other words, the goal is to invest in different asset classes so that you can increase your earnings.
When it comes to planning investments, many investors don’t know how to proceed.
With that in mind, in today's article, we're going to explain everything about subject of allocations. Read on to find out more.
What is asset allocation?
Asset allocation is an investment strategy that minimizes risk and maximizes returns.
In the financial market, the ideal is to never buy an asset of a certain type and leave it idle for an indefinite period of time.
To obtain good profitability, the investor needs to create a solid strategy and, therefore, manage the investments.
This means that diversifying your asset portfolio is essential for any investor.
To understand where it is most interesting to invest, it is important to know the your investor profile, set financial goals and monitor market trends.
It can be in shares, real estate funds or fixed income government bonds, for example.
Why do asset allocation?
Asset allocation is important because it helps provide a more stable portfolio by diluting risks.
The more diversified a portfolio, the lower the chances of loss.
Furthermore, through this process, the investor will have a better idea of the rate of return on assets and the risks involved in each operation.
But it's important to remember that the goal is not to diversify just for the sake of diversifying, but to create a solid strategy to increase opportunities and reduce risks.
How to do asset allocation: 6 efficient strategies
Now that you know what this concept means, you must be curious to know how to do good planning.
To help you with this, we have separated six efficient strategies.
Just look!
1. Strategic asset allocation
Strategic asset allocation is one of the most widely used forms.
Here, there is no reallocation of assets, even if a given stock depreciates.
To help you understand better, we will give you an example.
Suppose an investor usually has an average return of 20% in variable income and 10% in fixed income securities. If he puts together a portfolio of assets dividing fixed income and variable income in the same proportion, the average profitability will be 15% in the long term.
This strategy is static, as the focus is on the long term. Therefore, even if a given asset depreciates and becomes a smaller proportion of the portfolio, there is no reallocation between the modalities.
2. Constant-weight asset allocation
This is a very active strategy, as there is more investor involvement in relation to the portfolio.
In this case, it is essential that the investor frequently evaluates the assets that make up the portfolio.
In other words, he must make decisions based on the appreciation or depreciation of assets.
There are no very strict rules, however, experts recommend that the fluctuation in the composition of assets should not exceed 5%.
3. Dynamic asset allocation
As the name suggests, this strategy consists of a more dynamic allocation, that is, constant reallocation of funds.
This strategy requires a lot of agility in the decision-making process. Therefore, it is recommended for investors with a lot of experience and knowledge in the financial market.
4. Tactical asset allocation
In tactical asset allocation, it is possible to add short-term strategies to an investment portfolio with a long-term focus.
For investors to find good opportunities, it is necessary to monitor the market frequently.
Since this strategy requires the investor to find the best time to carry out short-term operations, the risks are slightly higher.
5. Secured asset allocation
This strategy is recommended for those with a more conservative profile.
In this case, the investor must establish a loss limit. If the limit is reached, the investor must reallocate assets to safer investments, such as CDBs, for example.
6. Integrated allocation
Of all forms of asset allocation, integrated is considered the most balanced.
After all, it takes into account the gains and investment risks according to the investor's profile.
Integrated allocation is also broader, as it allows for the mixing of other strategies, as long as, of course, there is no conflict.
How to do asset allocation?
Now that you know what asset allocation is, it's time to learn how to put it into practice.
To do this, follow these steps:
Define the percentage to be invested in each asset class
The first step is to establish how much you will invest in fixed income and variable income assets.
The choice, obviously, should be based on your investor profile, which can be:
• Conservative: doesn't like to take risks
• Moderate: want to get good returns but prefer not to take too much risk
• Bold: accepts taking great risks to maximize returns
Asset selection
There are different types of assets on the market.
In fixed income, for example, it is possible to invest in Treasury Direct bonds, CDB, LCI/LCA, CRI/CRA, among others.
In variable income, there are shares, investment funds and ETFs.
Percentage to be invested in each asset
After defining the assets that will be invested within each class, you will define how much will be invested in each asset.
Portfolio rebalancing
Portfolio rebalancing can be done whenever the asset portfolio is unbalanced.
Before rebalancing, you can establish an acceptable margin of imbalance.
Portfolio monitoring
This is one of the main mistakes investors make.
Many of them do in-depth research before investing, which is a good thing.
However, they then forget to monitor their portfolio and asset performance.
Keep an eye on the performance of the companies in which you own shares.
Furthermore, it is important that you follow market trends and continue studying the world of investments.
Conclusion
We hope this article has helped you better understand asset allocation.
When making investments, analyze the scenario carefully and always take into account your investor profile and financial objectives.
