What is asset allocation?
Asset allocation is an investment strategy aimed to balance risk and reward. It shares out the portfolio's assets according to your investment goals, risk tolerance and time horizon.
Different asset allocations have different levels of risk, below is an example of the risk associated with a selection of asset allocations;
'A risk management technique that aims to reduce risk through mixing up your portfolio with many different investments'
Diversification is particularly helpful when trying to offset unsystematic risk, which is industry/company specific.
Diversification is based on the rationale that any bad performers should be offset by good performers thus smoothing out unsystematic risk.
The lower the correlation between investments in your portfolio, the lower the risk
Example of Correlation;
Gold and the US Dollar
Gold is inversely correlated to the dollar meaning that the value of gold appreciates as the dollar weakens
Gold and Crude Oil
Rising crude oil prices tend to lead to a rise in the value of gold as gold is often bought as a hedge against inflation
Controlling Your Leverage
Remember! Leverage can be tailored according to your risk appetite. If you are risk averse, trade on higher margin requirements to reduce your leverage
Be Careful! Learn to control your leverage, treat it as a credit card, be careful not to get carried away with money you don’t have just because it’s available!
Technical analysis serves as an important aid in risk management
We can use it to:
- Identify & Time Entry/Exit points
- Identify Support & Resistance
- Strategic Stop Loss Orders
- Identify Trends & Chart Patterns
- Create Risk Parameters - Technical Indicators
All the above will aid the reduction of risk and help improve your chances of making profits.
For more information on Technical Analysis please see the "Analysis" Module