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Stock asset allocation is a financial strategy that involves assessing the type of stocks that will be included in a portfolio, based on the financial goals of the investor. The idea is to allocate a certain amount of resources to the securing of stocks within certain classes, creating a degree of diversification that often helps to provide additional stability to the portfolio. Under the best of circumstances, stock asset allocation creates a balanced portfolio that is capable of performing well in just about any economy, with some of the assets always posting gains that cover any losses sustained by other holdings.
The concept of stock asset allocation involves determining not only how much of the overall value of the portfolio to be composed of stock issues, but also what types of classes of stock should be included. For example, an investor may choose to include a combination of both common and preferred stock in the mix, while also taking care to secure shares of stock issued by companies operating in several different industries. The exact nature of the allocation will vary, depending on the level of risk that the investor is willing to assume, the returns generated by various stock issues, and whether or not the portfolio includes other types of investments like bonds or commodities.
Using stock asset allocation can go a long way toward protecting the financial interests of the investor. By choosing to devote no more than a certain percentage of the total portfolio to a given type of stock, the investor is able to limit his or her risk and stands a better chance of riding out a temporary downturn in the marketplace. While some shares are performing at lower levels, others within the portfolio will be doing very well in the market, allowing the investor to realize returns overall on the portfolio. This is especially important if the whole idea of the investments is to create a financial cushion for retirement or even for more immediate goals such as funding a child’s education or creating wealth that can be used to buy real estate or other holdings.
There is no one ideal formula for managing the process of stock asset allocation. While a great deal of the strategy is subjective, relying on the personal goals and proficiency of the investor, there are a few basic tips to keep in mind. The benefits of asset allocation are usually enhanced by seeking to diversify the portfolio to a point that adverse economic circumstances in one sector of the market will not undermine the portfolio to any great extent. The diversification in the type of stock issues included should always involve assets held in industries that are not directly related. Doing so makes it much easier to create a mix that ensures at least some of the assets will be appreciating in value even as others may be somewhat stagnant or even losing money for a short period of time.