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Finance: What is asset allocation? 1 Views

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What is asset allocation? Asset allocation is the process of executing an investment strategy that is tailored to a particular investor’s risk tolerance and return on investment goals. While investors would like to get as large a return as they can, those with weak stomachs will blanche at the volatility of option and high flying tech stocks and may endure less sleepless nights invested in large cap equities or bonds, eschewing the higher potential returns for greater peace of mind. Asset allocation also needs to be regularly reviewed and adjusted should market conditions change in order to minimize losses or erosion of gains.

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Transcript

00:00
finance- a la shmoop. what is asset allocation? alright well we have one
00:08
basket, and we have all of our eggs and we have enemy boulders ditches and speed [girl holds basket]
00:13
bumps in our way. they're all out to get
00:15
us. and everything's fine as we walk along
00:17
the path of life until one day, yeah oops carnage. well how do you avoid whoops in

00:23
the land of finance? well there are a couple of key things to keep in mind and
00:27
in baskets. first investments in an of an asset class like oil or transportation
00:33
or commodities like cotton or technology like software, very roughly tend to all
00:39
move together like Canadian Geese in the spring. that is the price of oil
00:45
controlled by Royal Dutch Shell, correlates almost exactly with the price
00:50
of oil controlled by British Petroleum or BP. there are two different stocks but
00:56
they generally move in lockstep so if you invested in one company odds are [man sits on mossy bench]
01:01
good that its performance will have been very similar to that of all of its
01:05
competitors in the same oil producing space. oil is an asset and the notion of
01:10
intelligent asset allocation is that you want to diversify away risk in your
01:15
portfolio by diversifying the asset classes in which you put your dough. so
01:20
if you wanted to be broadly exposed to the S&P 500 with its dozen or two asset
01:26
classes, well you'd want to pepper your eggs in some semi even distribution may be across baskets in telecommunications real estate utilities retail insurance
01:37
banking and so on. such that when those potholes come along and you trip in one [eggs put in a line of baskets]
01:42
and you most certainly will and the basket ends up looking more like paper
01:46
when you stand up because you smushed it. well then you still have eggs to cook
01:50
from other baskets you put your money in. if that still doesn't work well maybe go
01:54
vegan. [girl stands in kitchen with empty basket and fruits on the counter]
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