Asset Allocation

This blog text is about how I see asset allocation in an investment portfolio. At least in my own case. This is basically how I would advise someone else to allocate their money. My idea is to make sure that enough money is kept behind for a rainy day in safe places such as a bank account, and stocks or  other investments of this type hold everything else. 

I would say that the choice is between a bank account, bonds, stocks and finally, other assets (real estate, copper etc.)

First of all bank account holds what the investor needs during the next year and can't risk losing. For example money to pay rent and living costs for a year in the case of unemployment. Next (in the typical case that bank accounts pay less interest than bonds) investor puts capital into bonds that she definitely does not want to lose. Time frame is over one year and the idea is that the investment is always held till the end (Because bond prices can fluctuate and selling might mean selling with a loss, therefore it is best to wait for the bond to pay itself back). These are bonds that seem safe, such as German government bonds or debt of highly prestigious companies, such as General Electric and Volkswagen.

All this represents money that the investor does not want to take risks with, that he/she doesn't want to lose incase they are suddenly in need of cash due to sudden medical bills/ unemployment/ lawsuits etc. Few people instantly have enough cash behind them so this cash bumper must be built through time dividing income in appropriate manner between their portfolios.

Next comes money that the investor can truly invest in the purpose of making more money. Major part of this capital will be in stocks and rest could be in other assets, such as real estate, risky government/company debt, metals or options and commodities such as coffee futures. I would say that stocks alone are enough since you can divide your investments between safe companies and risky companies by following many different stock investing strategies. I also don't mean that investor should focus on one certain market, such as their home stock market. There is no reason to do this since world is full of quality companies in different countries. It all comes down to doing good enough research to base your decisions on. 

Due to interest towards certain areas or expectations of certain commodities for example experiencing a surge in prices it is understandable to invest into other risky(-ish) assets such as commodity prices. Someone could focus on these assets instead of stocks which is perfectly understandable if that is their speciality. 

Investor invests to those assets after serious concentration that this money won't be needed. Investor has made careful research and he has strong reasons to expect his investment be profitable after some years, but due to sometimes long waiting periods or negative changes in value his waiting period might be long. They accept this and are confident in their decision.

Some investors ask "How much should I invest in bonds, and how much in stocks?". To me this questions is irrelevant. In the long-term stocks in general are always better investment choices than bonds in general. Bonds hold capital that you do not want to risk, but want to get a better interest rate than a bank would pay. Stocks or other assets hold the rest of your wealth that you can tie down for long periods (such as real estate investments). As I said there are many stock investing strategies to follow. But basically I would say that unless investor already holds considerable wealth and only wants to enjoy slow but sure growth (by for example investing in to safe companies that pay high dividends) then I would advise any investor to follow a strategy that expects the actual stock price to grow (such as value investing strategy).

At the moment I personally focus on investing in to stocks, but I do follow other areas such as coffee prices and real estate investing for example. So some day I'm sure to invest in to these areas if I find suitable opportunities. 

An example of different possibilities an investor could go for: