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Understanding Asset Classes
Hundreds of sectors or industries trade their assets on the stock market. If you look at the S&P 500 index, there are several sectors that are available such as industrials, health care, technology, real estate, and many more. Those sectors can be differ based on several aspects. Those aspects are:
Risk vs Return
The stock’s price is depending on the growth sometimes, but the other is value. Some stocks will give you a high dividend price, while others use the profit to reinvest. If you are expecting a high return, then you need to risk more.
There are hundreds even thousands of multinational companies on the stock market either from small to large size. The value of the company determines the capitalization and the shares multiply by stock price every day.
Asset Allocation for Stocks and Bonds
Speaking about the investment, it means you have to know about asset allocations. Basically, asset allocation is the way you are dividing your assets into different classes. Your asset can be in the form of cash or securities, stocks, and bonds. Based on those asset classes, the main goal of allocating your asset is to maximize your return and minimalize the risk. In allocating your assets, you have to make a priority list that is from aggressive to the safest that can affect your return. If you ask about the portfolio percentage, the calculation is based on the risk tolerance and time horizon. If you still confused about what are the types of asset allocation, here is the explanation:
Ultra Aggressive Portfolio
If you wish that you will get 9% or more for the returns, you should allocate your stocks 100% it means that your portfolio only contains stocks. This portfolio allows you to get stable capital growth for the long-term. However, in the short-term, this kind of portfolio widely varies.
Some people do not want to risk their capital. Therefore, they choose the ‘safer’ way of allocating their assets. If you want to keep your capital rather than acquiring high returns, this kind of portfolio is suitable for you. You need to allocate not more than 50% on stocks. However, if you do not want to use stocks at all, you may be tempted that stocks can help you to offset the inflation.
Moderately Aggressive or 80/20 Portfolio
If you are considering having a long-term target and wishing rate of return at least 8% or more, you need to allocate 80% of stocks to your portfolio and the rest is to bonds or cash. This kind of portfolio is considered to have a medium level of risk tolerance.
An Aggressive Portfolio
This portfolio is focused on the equities, that the value can be change daily. The main goal of using this portfolio is to acquire long-term capital growth. This portfolio usually called a capital growth strategy.
Asset allocations are very important as this will affect your returns in the future. The asset can be in the form of bonds, stocks, or others. In fact, your decision in allocating your asset can be very crucial. An investment expert said that it is better if you are not allocating 100 percent on stocks. This argument is debatable because if you are lucky in the stock market, you will gain a high return even it is highly-risky.