Asset Allocation Preparation

Marc David Broidy obtained his BA in Theater from Pitzer College in California before proceeding to Yale to pursue a masters in Theater Management. He has served in several industries and is a former member of the board of governors at Cedars-Sinai hospital in Los Angeles, California. Marc Broidy also worked as a financial advisor at Smith Barney in New York City, tasked with preparing clients' asset allocation.

Asset allocation is an investment strategy that entails individuals dividing their investment portfolios into various separate asset classes to help minimize investment risks. The following steps will help an investor or financial advisor prepare an asset allocation.

Defining the investment objectives
The type of investments an investor will make depends on their objectives. As such, investors should give maximum thought to this stage, whether they're saving for retirement or financial stability in the future.

Determining time horizon and risk factors
Investors should identify their liquidity constraints and investment time horizon. Similarly, the investor would have to decide on their risk tolerance level (risk-averse or risk-taker) by considering factors like monthly income and expenditures and age.

Understanding different asset classes
An investor can work with three broad asset classes: cash, fixed-income, and equities. The riskiest asset class, equities, has the potential for delivering the highest returns and may include ordinary shares or funds that an investor can transact through an agent or broker. In contrast, fixed-income or debt provides more stable, but lower returns. Investors might invest in bond funds rather than directly in bonds to gain exposure in this asset class.

Lastly, cash equivalents or cash provide small or no returns. However, their liquidity makes them valuable during emergencies.