What is Investment Allocation?

Rome was not built in a day and unless you were born a trust fund kid, neither was your investment portfolio. When structuring your portfolio it is important to consider an investment allocation strategy in order to both reap the most benefits and reduce the risk of serious losses.

Asset allocation or investment allocation is a way for financial professionals to not put all of their money into one type of investment – or what investors would call “putting all your eggs in one basket.” Investment allocation is part of the Modern Portfolio Theory. The theory provides the tools, thoughts, and quantitative analysis for people looking to build a low risk portfolio for themselves.

Having a proper investment allocation in place will allow you to lower your investment risks. For example, Jane sold her apartment at the time when home values were high and made a significant return on her investment. Her long-term plan included relocating to a new state, renting an apartment for a few years, then buying a new abode. During that time, she stored her money in a low risk money market account that generated a sizable return on her investment. When she needed the money for her down payment, it was all there and easily accessible as that portion was diversified from the rest of her investment allocations.

Aside from that amount of cash, Jane also had a 401k in her portfolio. That investment allocation is in higher risk investments and until the recent turn of economic events, was flourishing at a nice pace. However, those high-risk investments have lost a good portion of their value, but since this is for her retirement (which is still decades away) there will be time to recoup her losses and come out ahead in the long run.

Before deciding on your investment allocation it is important to make a personal business plan for what course of action you plan on following. Then either on your own or with a trusted money manager work on an investment allocation with a combination of security options so you can better handle your financial future.

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