Asset allocation should be based on investment time horizon from "summary" of All About Asset Allocation, Second Edition by Richard Ferri
When constructing an investment portfolio, it is essential to consider the time horizon for which the funds will be invested. Asset allocation should be determined based on this crucial factor. The investment time horizon refers to the length of time an investor expects to hold an investment before needing to access the funds. It can range from short-term (less than one year) to long-term (10 years or more). Short-term investors, with a time horizon of less than one year, should focus on preserving capital and maintaining liquidity. Therefore, their asset allocation should be weighted towards low-risk investments such as cash and short-term bonds. This approach helps minimize the impact of market volatility and ensures that the funds are readily available when needed. Conversely, long-term investors, with a time horizon of 10 years or more, can afford to take on more risk in pursuit of higher returns. They have the luxury of riding out market fluctuations and benefiting from the long-term growth potential of stocks. As a result, their asset allocation should include a higher proportion of equities to maximize growth opportunities over the long term. For investors with a medium-term time horizon (between one and 10 years), a balanced asset allocation strategy is recommended. This approach involves a mix of stocks and bonds to achieve a balance between growth and stability. By diversifying across asset classes, these investors can potentially benefit from the growth potential of stocks while also reducing overall portfolio risk.- Investors can optimize their portfolio to meet their financial goals and risk tolerance. It is important to periodically review and adjust the asset allocation as the investment time horizon changes, ensuring that the portfolio remains well-suited to the investor's needs and objectives. Ultimately, a well-thought-out asset allocation strategy based on the investment time horizon can help investors navigate market uncertainties and achieve long-term success.
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