Asset Allocation
An important part of successful long term investing, and success in life, is effective asset allocation. In the stock market the asset classes are bonds and stocks versus cash or money market funds. Other assets include a person’s home, business investments, and for the majority of Americans, their eventual social security check. Effective asset allocation is a key to a balance of safe and aggressive ways to invest or trade. Most commonly, individuals apply increasingly conservative strategies for asset allocation as they approach retirement.
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How Can You Allocate Your Assets?
Within the stock and bond markets an easy way to allocate assets is to use an asset allocation fund. For example, there are mutual funds that offer mixed investments like US Treasuries, bonds, and stocks in various mixes depending on the risk tolerance of the investor. This can be a useful route for those whose day jobs take up all of their time and who do not have the skills nor the desire to do the necessary research. Also, such funds are commonly able to invest in vehicle that may not be open to the average investor.
Aren’t Diversification and Asset Allocation the Same Thing?
The concepts are similar. Asset allocation is when you choose the categories into which you will invest. Diversification generally refers to spreading out your investments within each category. For example, you may choose to put a third of your assets to work in the stock market and then diversify among tech, consumer stocks, and banking within your stock portfolio. Both approaches are used to gain access to more investment vehicles and reduce the risk of losing when one investment goes bad.
Determining Allocation of Assets
Asset allocation should be an ongoing exercise for investors. One may choose a standard allocation formula such as two-thirds stocks and one third bonds when one is younger and rotate to fifty-fifty in midlife before going to one-third stocks and two-thirds bonds before retirement. Likewise, entire market sectors may rise or fall as investment opportunities. As such, an investor is wise to compare performance of the various parts of their allocation scheme and adjust where they put their money to work accordingly. Simply comparing performance of any sector to a benchmark like US Treasuries is generally sufficient for this task.
Where Does Options Trading Fit in Asset Allocation?
An absolute fact of life in the investing world is nobody cares more about your money than you do. During most of the years after the Financial Crisis one did better in stocks by simply purchasing shares of an ETF that tracked the S&P 500 than by putting their money with a money manager. Here at Top Gun Options we saw how “smart money” missed the boat many times such as at the start of the Covid Crash and when the recovery started. People who trusted their asset allocation scheme to protect them from downside risk were still virtually wiped out. At the same time we at Top Gun Options virtually printed money in our trades because we were able to turn on a dime and trade the market that we had and not try to invest in a market that no longer existed! The point in options trading is that you do not need a rising market to make money!
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If a person wants to control their own financial destiny, options trading provides a valuable opportunity. Money that could have gone into a stock (that then falls to half its value) could be put to work in hedged options trades that offer financial leverage as well as risk protection. The most viable route to success in options trading is to work with a dedicated trading squadron such as one of those at Top Gun Options where we potentially profit in all markets and all seasons.
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Originally published at https://topgunoptions.com on March 21, 2023.
