Many of the wealthiest people in the world owe their fortunes to different types of residual and passive income. From stocks, bonds, investment trusts, real estate, commodities, or business, the wealthy know what to do with their money. It's time to discuss the importance of asset allocation, or how you spread your assets into different types of investment products.
When talking about asset allocation, I am referring to the various vehicles in which you invest your cash. You can split your assets into three specific classes – safe, risky, and speculative. It is advised that the largest chunk of your assets should fall into the safest investments (depending on your age this could be as much as 70% of your assets). The safest investments include cash savings, personal residence, and highly rated corporate bonds and government securities.
The next type of asset class is the “risky” variety – these tend to be longer term investments that are generally safe but there is no guarantee that you will receive your pricipal back. Assets in this class include stocks, mutual funds, and investment real estate. This type of investment is generally considered a solid choice with stocks of high pedigree companies usually being the option utilized by most people. The "risky" chunk of your total assets should include at least 30% of your assets.
Finally, we come to the speculative class of assets – these are highest risk products. These include stocks that you trade actively (jumping in and out within a few days/weeks), stock options, crypto-currency (like Bitcoin), etc. These should be 5-10% of your total assets at most.
Many experts believe that the asset allocation proportions should vary according to the investors age. I am not alone in saying this. For example, those currenty age 40 or below may wish to employ a more aggressive strategy where only 40% of assets are in safe investments and 50% are held in risky, with 10% being speculative investments. Your personal circumstances, your preference for risk, and a lot of other influencing factors should be considered before arriving at your asset allocation mix.
One of the first things I advise my readers to do is to create a plan for their business. A plan helps put all your thoughts together, and gives them a blueprint of sorts to get where you want to be.
Here are just a small sample of things that your personal investment plan should include:
1. What amount of money do you have available to invest? How will your money be allocated within each different asset class?
2. How will you find investment opportunities? Will you learn about them yourself or will you seek out professional advice?
3. How will you handle your investments losing value?
More to come in the future.