Establishing and maintaining a portfolio allocation is an essential function in asset management. Diversifying a portfolio across multiple asset classes is key to minimizing large losses. I created the models below to illustrate simple allocations across multiple asset categories, and then built up from markets, to sectors then individual holdings.
This model represents a conservative allocation. The majority of the funds are meant to provide an income from the investments.
The bulk of the funds are in broad markets. For example; the total bond market, a REIT fund containing apartments to high office towers and everything in-between, the total U.S. Stock market, and the total foreign market.
A moderate conservative fund changes the allocation only slightly from a conservative allocation.
This represents an allocation that includes commodities. Commodities add another layer of risk and reward and a moderate investor might be able to tolerate the additional risk. In general commodities are more sensitive to supply and demand changes. Most people know this when it comes time to fill their gas tank.
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Commodities are risky by nature. As an investor wishes to assume more risk their allocation shifts towards individual holdings and commodities. Individual holdings and commodities can add significantly to a risk reward profile.