allocation in a portfolio critically depends on this; remember each asset class carries different types of risks like market risk, credit risk, liquidity risk and interest rate risk. For any investment, a certain amount of risk cannot be ignored. But while investing in asset classes which offer higher returns, individuals must analyse their own risk taking (depends on the objective, time horizon, income level and age) and risk tolerance abilities (capacity to lose some or all of initial and subsequent investments in exchange of greater potential returns). E.g. an individual of over 40 years of age but with a stable long term income source can look at investing a relatively higher portion of the portfolio into risky assets such as equities unlike an individual unlike someone of the same age but with a not-so-stable long term income source.
Pick the right asset allocation mix
Traditionally, the three main asset classes are equities, fixed income (debt) and cash and equivalents. There are non-traditional asset classes such as real estate, gold, and commodities, to gain additional returns even though these assets carry additional risks compared to traditional assets. By allocating capital across several asset classes, the benefits of diversification can maximize gains and minimize the losses. After deciding upon different asset classes, individuals must develop an asset allocation