Smart asset allocation key to effective wealth creation

May 20 2014, 06:40 IST
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SummaryAsset allocation is the process of distributing an investor’s wealth among different asset classes.

that may perform differently under different market scenarios.

One way of diversifying your investments within an asset category is to identify and invest in a wide range of companies and sectors. But the stock portion of your investment portfolio won't be diversified if you invest, for example, in just 4-5 stocks. You'll need at least a dozen carefully selected stocks to be truly diversified.

Each individual’s financial plans and investment needs are different, changing with the life stage. How an individual structures his asset allocation strategy should depend on his age, financial status, future plans, risk aversion and needs. Asset allocation is not an isolated choice, but a component of the portfolio management process.

The writer is an associate professor in finance and accounting at IIM Shillong

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