Asset allocation is a wealth distribution strategy.<\/p>\n
It represents the way an investor\u2019s portfolio is divided into different investments.<\/strong><\/p>\n Determining the asset allocation is one of the most important decisions an investor needs to make before\u00a0<\/strong>deploying capital in any investment.<\/p>\n Let\u2019s say an investor is exposed to the following asset classes:<\/p>\n Below is a pie chart showing what might be this investor\u2019s asset allocation:<\/p>\n Remember, a long-term asset allocation is determined once<\/strong>, but it requires continuous nurturing<\/strong>.<\/p>\n This means that every time the investor contributes to his portfolio, he\u2019ll aim to make the percentages as close as possible to the predefined allocation. Neglecting it may cause your allocation to shift and expose you to more risk than you\u2019re ready to bear.<\/p>\n The asset allocation of an investor doesn\u2019t always need to include all assets\/asset classes he\u2019s exposed to.<\/p>\n Let me give 2 examples of investors who implement the same investment strategy, but under different circumstances:<\/p>\n If each of them evaluates how their net-worth is distributed<\/strong>, it would be quite different from the other.<\/p>\n But since they don\u2019t modify their cash, precious metals, or real estate<\/a> positions to match their stock investments, their strategic asset allocations<\/strong> are basically the same:<\/p>\n They\u2019re both 100% in stocks.<\/strong><\/p>\n Remember:<\/strong> an asset allocation doesn\u2019t<\/strong> show how an investor accidentally<\/strong> ended up with some distribution.<\/p>\n It represents the investor\u2019s ideal exposure\u00a0<\/strong>to the asset classes.<\/p>\n It\u2019s a proactive\u00a0<\/strong>strategy, where the percentages are defined upfront \u2013 and only then the investments are made in compliance with it.<\/p>\n Apart from determining the asset allocation across various asset classes, the internal distributions are also important.<\/p>\n For example, a stock portfolio of 5000 companies would behave quite differently than a stock portfolio of one company.<\/p>\n If you\u2019re picking stocks, you\u2019d need to have a per-company allocation determined. But if\u00a0you\u2019re investing in ETFs<\/a>, you can keep it higher-level.<\/p>\n For example: figuring out your ideal geographical distribution or exposure between developed and emerging markets, etc.<\/p>\n Below is an example of one such allocation:<\/p>\n\nExamples of Asset Allocation
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![\"asset-allocation\"](\"https:\/\/monkwealth.com\/wp-content\/uploads\/2022\/07\/asset-allocation.png\")
<\/p>\n\nAsset Allocation vs Net-Worth Distribution
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![\"asset](\"https:\/\/monkwealth.com\/wp-content\/uploads\/2022\/07\/stock-allocation.png\")
<\/p>\n\nInternal Asset Allocation
\n<\/h2>\n![\"asset](\"https:\/\/monkwealth.com\/wp-content\/uploads\/2022\/07\/stock-allocation-2.png\")
<\/p>\n\nAge-based Asset Allocation
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