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What types of investment strategies are you planning or pursuing? Preferably, you’ve diversified your portfolio with some stocks, bonds, ETFs, or real estate. The nature of these investments varies, and so too do their risk profiles.
It’s often said that with no risk, there’s no reward, and that can apply to investing. If there’s hypothetically no risk, there wouldn’t be any reason to reap the rewards of interest or the asset accruing in value. If an investment is too risky, it can be highly rewarding or potentially catastrophic. A well-rounded asset allocation strategy should fit your needs and circumstances, leaning more towards “safe” investments (defensive) or “risky” investments (aggressive), or a curated blend of both. In this article, we’ll explore the difference between defensive and aggressive asset allocation and how you can find out which is best for your needs. What is Defensive Asset Allocation? Defensive asset allocation is a strategy in which asset protection takes precedence, with modest growth being a secondary but still important consideration. It prioritises safety and minimising risk over the potential of large rewards, so it seeks to minimise potential losses in the event of a market downturn, for example. This means that many traditional financial instruments are appealing for defensive asset allocation. Generally, this includes things like government bonds, stocks in well-established companies, a diversified portfolio, and holding more liquid assets on hand. Defensive asset allocation is appealing for retirees and those approaching retirement age, mostly because it hedges the potential losses that they could face in their later years of life. It’s well-suited for more risk-averse people, meaning they don’t want to take big risks with their hard-earned wealth. What is Aggressive Asset Allocation? Conversely, aggressive asset allocation is a strategy that emphasises rewards over safety, so it’s generally more “risky” and naturally more suitable for individuals who are not afraid to take bigger (but still calculated) risks with their investments. Some of the more popular financial instruments for those with an aggressive asset allocation include individual stocks in up-and-coming companies, options trading, margin trading, or leveraged trades that could greatly amplify the potential rewards from a particular stock. Generally, these sorts of strategies tend to be better-suited for younger individuals with many working years ahead. This allows them to absorb the potential downsides while still reaping the potential upsides of riskier investments. Which Investment Types are Best for Your Retirement? When it comes to choosing which type of asset allocation - aggressive or defensive – it isn’t always a binary choice. In most cases, your optimal investment portfolio will have a healthy mix of both so that you can see real, meaningful gains without overexposing yourself to too much risk. For retirement in particular, good financial planning is always a strong recommendation. You’ll ideally want to understand your own risk tolerance, estimate the potential for volatility, and set realistic time horizons for savings. All of these things can be challenging, which is why it’s a great idea to consult with a qualified wealth management firm near you to better gauge the ideal asset allocation for your investments and with your needs and preferences in consideration. Davlin Wealth Management Get in touch with Davlin Wealth Management for financial planning and much more Comments are closed.
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