Most people have a portfolio of investments where they hold different stocks and bonds. They are often referred to as “portfolio diversification”. However, there is no such thing as “one size fits all” when it comes to investment portfolios.
While most shubhodeep prasanta das investors operate under the assumption that they should invest a fixed amount in order to cover their expenses, this cannot always be done given the fluidity in the market where asset values fluctuate over time. Here’s how broad should your investment portfolio be:
Asset Allocation
The first step in determining the proper asset allocation is to determine how your total investment portfolio should be invested. If you have a fixed income, then it might be best to follow a fixed asset allocation methodology where you allocate between 60% to 80% of your portfolio toward stocks, and 20% to 40% toward bonds.
However, if your investments are more volatile, then you need a more diverse portfolio that can provide an adequate return in the event of higher market volatility. In this case, you might need to allocate between 30% and 50% towards stocks, and 10% to 20% towards bonds.
Diversification
The second step in determining the proper asset allocation is to determine how your total investment portfolio should be diversified among different asset classes. You may favor blue-chip stocks over utility stocks, and you might not be interested in holding a majority of municipal bonds which are very thoroughly analyzed by the bond market’s experts. In this case, it would make sense to diversify your portfolio by focusing on individual categories within the asset class of your choice.
It is important to note that diversification is not a stand-alone factor in determining the proper asset allocation. All else being equal, it is better to have an all in one approach to allocating different asset classes while also holding a wide variety of different types of assets within those categories.
