One of the goals of any type of asset allocation effort is to create a balance in the portfolio between the different holdings that ultimately allows the investor to enjoy a steady flow of returns from those investments. At the same time, the idea involves balancing the range of assets so that any short-term losses on some of the holdings are offset by significant gains with other holdings. There are several factors that can affect the generation of returns in asset allocation, including the careful selection of assets, arranging assets to achieve by short and long-term returns, and even the ongoing management of those assets that is required to protect the interests of the investor.
One of the main factors that affects returns in asset allocation is the identification of what the investor wishes to accomplish with the investment portfolio. Here, the idea is to set goals that are both short-term and long-term in nature. Knowing the desired outcome of creating and maintaining the portfolio makes it easier to determine what type of assets should be included, and will even aid in deciding how much of each asset is necessary to reach those goals.
The careful selection of assets is also crucial to generating returns in asset allocation strategies. Based on the goals set for the effort, an investor may include an eclectic collection of assets, such as stocks associated with several different industries, some bond issues, futures options, commodities, and possibly even real estate and a few alternative investments like artwork or jewelry. The selection should include enough variety to ensure that if downturns affect assets traded in one market, those that are associated with other markets are capable of generating enough profits to keep the goals for short-term returns as well as long-term returns on schedule.
While establishing a diversified portfolio that has exactly the right mix of assets is an excellent starting point for earning returns in asset allocation schemes, there is still a great deal of work to do. The movement of each of the assets must be monitored, as well as emerging trends identified and projections for future movement determined. With so many investments constantly experiencing fluctuations in value, the investor must remain receptive to making some changes in the portfolio holdings in order to keep the returns at acceptable levels. This may mean at times selling a percentage of certain types of assets, buying more of a different asset, or even selling stock associated with one company and replacing it with shares issued by a company operating in the same industry. Without this monitoring and willingness to make changes when necessary, the portfolio will likely begin to generate fewer profits, effectively undermining returns in asset allocation and defeating the entire purpose of using this strategy.