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The following article was published in our article directory on October 13, 2010.
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Tips On Using Asset Allocation To Your Advantage

Article Category: Advice

Author Name: Garth Wheeler

There are two approaches you can take with your stock investment strategy. You can choose to go for the winning punch which means you swing with all you have and hope that you connect with a homerun hit or you can choose to use a longer term diversification approach by taking advantage of asset allocation techniques.

Asset allocation is the process of finding those stocks which have little correlation to one another. If one stock goes up, then the other stock may not go up as much or will go down. It is more than not putting all of your eggs in one basket. It is a process of finding the stocks which complement each other in such a way that your risk actually decreases through the ownership of the two stocks.

There is a statistical term used to measure risk. This term is known as standard deviation. The mean or average of a set of numbers is measured. Then based on the standard deviation, you can determine a range of possibilities that could occur. One standard deviation means that there is a sixty-seven percent change that the stock will move within a -1 to +1 from the mean. Two standard deviations means there is a ninety percent chance it will move in a -2 to +2 range.

When you purchase one stock you are subjecting yourself to the full extent of the risk associated with that stock. However, if you purchase two uncorrelated stocks, you can set yourself up to not have standard deviation of -2 to +2 but may encounter the situation where you encounter a -1.2 to +1.2 investment range. You then are able to reduce your risk through this choice of stocks.

The idea behind asset allocation is that you find the optimum mix of stocks to purchase which will give you the best chance to succeed in your investment strategy. Your stock picks then become more valuable. There are many different asset allocation software programs which are available to help you to determine the optimum stock mix. By taking advantage of this knowledge you can base your stock picks on a more successful strategy and enable yourself to make money with your stock picks.

The other method of stock investment which you can use is the home run hitting approach. This strategy is pretty much a gamble with your stock picks. You need to be able to find that one or two stocks which will enable you to make a killing with your stock picks. If the stock price falters, or does not go as planned, then you may lose your investment. I recently looked at a stock which looked promising but I simply did not know since it was quite risky. It was in China and seemed like quite a gamble. It just recently climbed eighteen percent in one day because of discussion on taking it private. If I had taken the plunge, I would have won. The thing is you simply do not know.

It would be my recommendation that you use a long term approach with your stock investment style. I feel that it will serve you better in the long run.

Keywords: asset allocation, stock picks, diversification, stock market, risk, standard deviation

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