The Importance of Proper Asset Allocation Introduction Asset allocation is one of the most important investment strategies and it is a popular financial strategy in current financial market. This strategy helps the investors to reduce the overall risk of an investment portfolio by apportioning all the assets of portfolio…
The principal determinants of the investment results are allocation of investments in stocks, cash and equivalents and in bonds. Asset allocation constructs the framework of the portfolio and addresses the issue of where to invest money effectively to gain maximum return. Proper allocation of assets has the potential to increase the investment results and lower down the volatility of the overall portfolio. However critics are of the opinion that interdependence among the financial markets makes the traditional form of asset allocation less volatile. Again some of the researchers viewed allocation of assets could lead to better overall results but the implementation of the asset allocation techniques needs to be more flexible so that it can adopt to the changing trends in the market (Idzorek, 2012). There are two distinct ways of asset allocation namely calculating the value of asset allocation and the several diversification techniques. The first way arises from the portfolio design standpoint while the second concludes to the ways the portfolio can be structures in effective fashion. Article Summaries Munnell, Orlova and Webb (2012) conducted a study on narrow topic of importance of asset allocation to financial security after retirement with the use of analytical frameworks, theories relating to financial studies. They aimed to focus on the financial assets with the help of three stages. The first stage provided the example of trade off between returns with the amount of time spent in the labor force while the second stage uses the HRS data to analyze the gap between the needs and resources if retirement. The third section uses a dynamic programming model with the aim to calculate the risk adjusted measure of the value of average households while moving towards the optimal portfolio (Munnell, Orlova and Webb, 2012). They suggested that the tools of financial planning frequently highlight the asset allocation decision which suggests that individuals can achieve a lot of gain through use of optimal allocation of stocks and bonds. The second stage of the analysis showed that for a typical household optimal allocation of assets is not much of importance. The optimal allocation of assets was of much importance for the households belonging to the higher income group (Clements, 2005). The financial advisors can help the households in terms of controlling the expenditures or working for longer hours of time. Chen and Milevsky (2003) conducted a financial study on the importance of asset allocation on longevity insurance. The objective of their study was to review the necessity of longevity insurance of people during their retirement and develop an integrated framework to conduct detailed study on the asset allocation decision which consists of immediate payout of annuity products and other conventional classes of assets. This study was adopted by the motivation from earlier studies on the narrow area of developing payout annuities through asset allocation in public pension provision. The researchers have investigated deeply on the topic by implementing traditional and modern theories and applications of optimal allocation of assets. The main qualitative outcome from this study was as follows. Spectrum of natural asset allocation considers the risk associated investment strategy that go from the risk free i.e. fixed return and the risk associat ...
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