Asset Allocation Asset allocation is the process of deciding how to distribute an investor's wealth among different countries and asset classes for investment purposes. An asset class is composed of securities with similar characteristics, attributes and risk/return relationships. In other words, asset allocation is defined as investing money or diversifying across different asset classes, like stocks, bonds, and money market funds. Asset allocation involves several risks, such as liquidity needs, time horizon, tax issues, legal issues. and regulatory factors and unique needs and preferences. Explanation of the riska. Liquidity Needs – The asset is liquid if it can be quickly converted into cash at a price close to its fair market value. The investor may have liquidity needs that the investment plan must take into account. - For example, a 25-year-old investor probably has little need for cash because they are focused on their long-term retirement fund goal. These constraints may change if you are faced with a period of unemployment or a term close to your goal. From the age of 65, the investor has a greater need for liquidity.b. Time Horizon – The time horizon as a briefing on investment constraints came into our previous discussion on high priority short and long term goals. - Investors with a long investment horizon generally need less liquidity and can tolerate greater portfolio risk. Less cash flow because funds are usually not needed for many years. Greater risk tolerance, as any losses can be offset by profits and returns in subsequent years. - Over short time horizons, favor more liquid and less risky investments because losses are more difficult to overcome over a short period. Tax Concern – Investment planning is complicated by the tax code. Tax complicates the situation...... middle of paper ...... rental products for each of the sections. Many individual stocks, mutual funds or index funds catering to specific asset class needs. It is also worth comparing the costs associated with each type of investment. Index funds are a good choice over any other asset class because they minimize costs while outperforming most competitive active funds. Since they are buying and selling assets, this is a great time to consolidate accounts or roll over a former employer's $401k to a rollover IRA. so that you have easier access to all investments and can more easily track progress in the future. The investor should ensure that they follow the asset allocation plan over time and rebalance it as necessary to ensure that the portfolio maintains the risk exposure for the investor's age. defined.References:1. Investment analysis and portfolio management, by Reilly Brown, 7th Edisio