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Asset allocation mix is a term often applied to an individual's or company’s investment portfolio. It is necessary to mitigate the risk associated with creating an investment portfolio. Choosing the best asset allocation mix includes the purchase of low-risk and high-risk investments, the use of different investment strategies, and a plan for executing changes to investment portfolios that work best as the economy around the investor changes. Companies may also follow the strategies an individual uses when creating an investment portfolio mix. In some cases, however, a company may alter its investment practices due to its ability to purchase large investments.
Risk is almost always present in every investment portfolio and investment market. Therefore, savvy investors need to create an asset allocation mix that preserves some funds in the portfolio. A common strategy to create a successful portfolio is to purchase low-risk bonds and stock. Though financial returns are certainly lower with these investment options, they are fairly stable and able to offset some losses on higher-risk investments. Setting limits for each portfolio portion in terms of risk can help create stability, such as limiting high-risk investments to a maximum of 20 percent of the overall portfolio.
Different investment strategies are necessary for different economic times. Investors must be aware of current market conditions and the direction the market is heading. For example, investors who have a solid mix of stocks that will increase in price may need to change their strategies if the stock market falls. During this period, it may be wise to begin selling a few stocks short, meaning the investor makes money as stock prices fall on certain investments. This allows an investor to grow his or her portfolio through both market booms and market busts, increasing the value of the asset allocation mix.
All investors need to have a plan for executing changes to a portfolio during certain economic time periods. One key reminder is for an investor to never fall in love with a stock. For example, as soon as the investment begins to falter or the investor believes the company will struggle, an immediate change to the asset allocation mix is necessary. The investor may need to sell investments and purchase other ones in order to remain profitable. Moving into different sectors or even international countries for the creation of a proper asset allocation mix may also be part of an investor’s plan.