Asset allocation is the process of working to be patient and still make money with your investment strategy. Warren Buffet said “The stock market serves as a relocation center at which money is moved from the active to the patient”. In the movie “Cars”, Lightning McQeen had to learn how to be a little patient and how to make his speed work for him. Doc taught him this with the lesson of how to drive in dirt. This is similar to what needs to be done with an asset allocation approach. The investor will want to purchase stock in a number of different growing companies that will diversify his investment. This will serve to provide a controlled speedy return with minimal risk.

There have been many different articles and debate on asset allocation. There are many different mixes that can be considered with this investment style. The most common one is the equity/bond mix. However, there is also the domestic/international equity mix, the nominal/inflation-adjusted mix of bonds, or what mix of indexed funds or market capitalization weights should be used. The proper mix of efficient tax free funds is also a consideration.

There are asset allocation calculators available that will help you to determine an optimum mix of asset investments to have both high returns and a minimal amount of risk. Warren Buffet also is reported to have said, “Risk comes from not knowing what you are doing.” It may be a good idea to talk to a stock broker, or to use the asset allocation calculators to arrive at what makes sense for you with your goals and risk aversion.

One of the problems with the asset allocation calculators is that they are using previous statistical data. It may be that things have changed with the stocks dynamics. This may cause a false reading on your optimum asset allocation. There are some theories that asset allocation using old data is a waste of time. I do not feel that this is the case. I think that a person can use what feels right for them, and determine an investment mix that works for them. This investment mix can be tweaked over time. Whatever mix an investor arrives at, it should definitely be rebalanced on an annual basis to maintain the original mix. Rebalancing is the process of selling the stocks that have done well and purchasing additional quantities of stocks that have lagged. This strategy serves to allow the investor to make money by buying low and selling high.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.

Everyone who invests in the stock market does so to increase the return on their money. However, you may be asking yourself the question of how you can increase your stock market returns. The first thing is that you need to remember with your investing strategy is that the point of investing should be to beat inflation. Those investors who try and hit the home run usually end up striking out. Most investors need to realize that the best reason to invest is to grow your money consistently. The stock market will experience ups and downs, but the overall trend of the market will be up. With a proper investing strategy, you should be able to beat the inflation monster.

If trying to hit the home run is the first mistake that investors make, the second mistake is not diversifying enough. You need to make sure that your investments have the proper asset allocation. With the correct asset allocation, some of your stocks will go up when others are going down. You will also be able to diversify your way to higher returns with lower risk.

Another suggestion for your investing strategy is to realize that bear markets do end. Many times the bear market will end before people realize it. I remember during the last recession, we were six months out of it before the economists announced we were out of the recession. You need to watch the signs of the times to see the trend. Make sure you are invested in the stock market when it goes up or you will miss out on the opportunity.

One of the ways to identify the end of a bear market is a contrarian method. The viewpoint is that if the consensus view of investment advisors is gloomy, then it is time to get into the market. Another identifier is when the market stops falling on the announcement of bad news. There is a theory that states that most of the weak sellers have sold out, and the market will not react any longer to additional bad news. Investors will merely shrug off the bad news. The beginning of an increase in IPO’s is another sign that companies are getting good feelings of where the economy is going.

Also watch for articles discussing the sentiment of the company’s accountants. If the accountants have a good feeling about the timing to begin spending again, then it can be a sign that things will improve in the next six months. The accountants are the ones who will decide it is time to begin purchasing and hiring. They are a conservative bunch, so if they feel good, then you can feel good also.

There is another article titled “investing for growth” posted on this site. It will give some additional tips on how to enhance your trading strategy.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.

Investing in large cap stocks is a smart thing to do for the proper diversification of your stock portfolio. Harry S. Dent, Jr., an economist, stated that “The best time to buy large cap stocks is at the beginning of a growth boom. The race for market leadership favors large companies.” You should invest in large cap stocks for two reasons. The first reason is because they are more stable stocks. Their revenue and profit will not be as volatile as the small cap stocks. The second reason is that it is a smart thing to do if you feel that the economy is entering a growth period.

Large cap stocks, by definition are those stocks with market capitalization above five billion dollars. In order for a company to reach this pinnacle, they will have to have been around for a long time, and have shown the ability to weather a number of economic cycles. They have shown by this stability the reason that an investor should have them in their portfolio. Placing a portion of your investment in large cap stocks will also help with your asset allocation. They help to stabilize your investment.

On December 22, 2009 an article by the Fidelity Management & Research company stated their expected outlook for the market, and they discussed which asset classes an investor should have their money in. They indicated that “at this point in a recovery period that performance patterns among market-cap sizes have typically become less distinguishable. As a result, owning some exposure to all market cap sizes remains an effective way to diversify the equity allocation within a portfolio.”

In relation to large cap stocks, they indicated that with the large cap company ability to raise capital globally, they are positioned better to take advantage of opportunities that may present themselves in the immediate future. They also stated however, that the large cap companies may have a hard time initiating large returns due to their defensive natures.

If you want to have a properly diversified portfolio, and wish to position yourself to take advantage of the economic growth, I would suggest that you look into slowly increasing your percentage of large cap stocks in your asset allocation.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.

The idea behind proper asset allocation is more than not putting your eggs in one basket. It is actually the process of developing an investment strategy that optimizes your investment to get the most return with the least risk.

Let’s say you have two stocks that you are looking at investing in. These stocks have very similar characteristics. In fact, their stock prices generally move together. If you chose to invest in a 50/50 scenario with these two stocks, you would not accomplish the best use of your money. You might as well have chosen just one of the stocks. Now let us say that when one of the stocks goes up, the other one goes down. Thus if you invested in a 50/50 scenario, in all cases half of your investment would be going up at all times. Covariance is the statistical term used to explain how stocks are correlated to one another. The smaller the covariance, the more they are unrelated.

Another statistical term to introduce is the standard deviation. This is a measurement of the amount of risk an investment has. Let us say that a stock has an average return over the past 10 years of 15 percent. Now let’s say that the stock has a 10 percent standard deviation. That would mean that there is a 65% chance that the stock will generate a return of 5% to 25% return. There is also a 95% chance the stock will generate a return of -5% to 35%.

Asset allocation theory states that you can add a second investment and get the potential return to a 18% return with a standard deviation of say 11%. You have increased your return without increasing your risk by that much. If you add two more assets to diversify your portfolio you can obtain a greater amount of return and possibly reduce your risk from investing in only one stock.

So the idea behind proper asset allocation is that you find the optimum asset classes to invest in. You should look for asset classes that are not related to each other. This can be done by using an asset allocation software. You would then find the best stocks within each asset class and also use the asset allocation calculator to determine how they are related to one another.

The optimum mix would be where the percentages of each stock purchased will maximize your return with the least amount of risk. You might invest in 10% of one stock and 20% of another stock. It depends on what the asset allocation software indicates you should do to create the best mix. In this way, you are able to create the greatest opportunity to make money with your investments. There are many different allocation software programs on the market. In another post, I will evaluate the software programs and indicate which one I feel you should purchase.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.