Asset Allocation (continued)

More on Asset Allocation and its diversification

Model 2- Income

Portfolios associated with the income model may consist of investment grade, fixed income obligations of large, profitable corporations, real estate companies (largely in the form of Real Estate Investment trusts or REITS, treasury notes and a small amount of shares of blue chip companies with long standing histories of continuous dividend payments.  An example of an income focused portfolio might be from a young widow with children that has just received a lump sum of money from the life insurance of her deceased husband. Income to live on is a focus while maintaining the lump sum amount.

Model 3 – Balanced

This takes a position halfway between the income and growth asset allocation models and is known as the balanced portfolio. It is usually the best option for most people for financial and emotional reasons as these portfolios attempt to strike a balance between long term growth and current income. Therefore the ideal result will be to generate cash as well as receive appreciation over time with smaller fluctuations in the value of the principal than with all-growth portfolio. The Balanced portfolios tend to invest in medium –term investment grade fixed income investments, shares of common stocks of corporations (mostly that pay dividends). Real estate holdings that include REITs are also often a component of such portfolio. The latter is generally always fully invested in non-cash equivalents (vested) unless there is an overwhelming reason that there are no attractive opportunities with acceptable risks that exist, then portions will be held in cash equivalents.

Model 4- Growth

This AA model favors those just beginning their careers where building long term wealth is a main focus. The assets are not necessarily required to generate income because the investors have a source of income from their active employment, living salary for needed expenses. Such an investor is also likely to deposit additional investment funds over time. The benefits are that in a bull market growth portfolios generally do much better than others using other models however in bear markets they are the hardest hit. Up to 100% of the portfolio may be invested in common stocks with a large portion of which may not pay dividends and may be young stocks. Some of the portfolio might also be invested in international equity components outside the United States. 

Investments changing with the Times

An Asset Allocation strategy will require changing as the investor needs change as they move through various stages of life. A portion of the assets may be moved to a different model prior to major life changes. For example an investor 10 years from retirement might be advised to move 10% of his portfolio each year into an income –oriented allocation such that by the age of retirement all assets will reflect that objective

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