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What Is an Asset Mix?

Ray Hawk
Ray Hawk

Asset mix is a general term used to define the major ways in which an individual can protect his or her wealth and invest it for future growth. It is divided up into three standard categories: cash and assets that are easy to liquidate such as bank accounts or real estate, fixed income investments such as government bonds, and equity investments such as stock. Divisions within these broad categories would include commodities such as gold and silver, which are a short-term version of an equity investment, controlling interest in a company as a limited partner income investment, and other types of speculative investments such as foreign stocks or involvement in currency exchange trading.

Recommendations for asset mix are often based on a time horizon, or the age of the investor and what his or her goals are for investment growth. Each category of asset is taken as a percentage of all wealth combined, and a risk profile is generated based on how much of the total asset allocation is in high-risk versus low-risk sectors. Growth investing, where long-term investments are the core feature of an asset mix, are often recommended to young investors, and similar stable, low growth assets are recommended to those who are retired and have limited wealth that they depend on for their livelihood. Other combinations of higher risk level are usually offered to individuals depending on their outlook and willingness to target their asset mix towards high-growth, high-risk categories.

Man climbing a rope
Man climbing a rope

One of the easiest ways to look at asset mix by sector breakdown is to examine the asset class allocation in mutual funds. Mutual funds are divided up into risk categories, such as income funds, capital appreciation funds, and life-cycle funds. A life-cycle fund is one in which the mix of investments in the fund is gradually changed as the investor ages, so that, as time passes and the individual moves towards retirement age, more and more of the fund is based on lower risk investments. A capital appreciation fund by contrast, focuses entirely on maximum growth, and the asset mix is targeted towards the fastest growing sectors of an economy regardless of the risk involved. Such funds give a good understanding of risk levels for different assets, but are built to accommodate the general public with little personal attention to details, and are not recommended to active investors.

Securities organizations, such as the Securities Exchange Commission (SEC) in the United States, offer several proven principles that are good guidelines to start out with when determining an asset mix. One of the first is to diversify, or to have assets placed in an array of competing or varying sectors, so that if one sector is performing poorly, it would be most likely balanced out by others that are performing well. A second principle is to look at personal goals and the amount of time that it may take for an asset to grow to a certain level, as well as how long it would take oneself to recover if an asset lost value. The third fundamental principle of protecting wealth is to first determine the risk tolerance that is comfortable. Whether investments are growing or not, what's just as important is that the individual feels comfortable with the process and the fact that he or she has put his or her money into situations appropriate to his or her needs and goals.

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