In the work stock investment allocation, some common mistakes include putting all your money into one stock or unevenly allocating capital. This can lead to great risk when one stock struggles, or potentially great loss when not properly assessing the potential of each stock. Lack of careful and regular calculation in allocating cash flow may have negative consequences for the portfolio and affect investment performance.
1. What is stock investment allocation?
Stock investment allocation is a strategy. Asset Management, money by spreading capital across your portfolio, or using portfolio diversification – investing in a variety of assets such as stocks, bonds, commodities and cash.
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The asset allocation model is derived from the basic principles of human wealth management. Since ancient times, people have recognized the significance of dividing assets into different classes such as land, shares, and cash reserves, gold. This helps to minimize risks and ensure the stability of assets.
A major step forward in the field of asset allocation came in 1952, when Harry Markowitz, an American economist, published a paper titled “Portfolio Selection”. In this paper, he developed the first mathematical model that emphasized minimizing volatility in a portfolio by combining different investments. This idea laid the foundation for modern portfolio management theory, opening a new door to understanding and applying asset allocation in investing.
Modern Portfolio Theory (MPT) provides specific guidance on how to allocate money for stock investments.
Theory "modern portfolio” (Modern Portfolio Theory – MPT) plays an important role in portfolio construction because it provides a theoretical framework and computational method for portfolio management. MPT requires investors to make many assumptions about financial markets and use mathematical equations to calculate correlations and associated risks.
The basic premise of MPT is to combine different securities with low correlation to reduce portfolio volatility and increase risk-adjusted performance. However, diversification is not simply a matter of combining a variety of assets together, but rather a matter of selection. This requires careful consideration to not only optimize performance but also minimize risk. Diversification does not require assets to be perfectly uncorrelated, but only if the correlation is not too high, an efficient portfolio can be created.
2. Why do investors need to allocate securities assets?
Asset Allocation is an important aspect of portfolio management and a necessary strategy to minimize risk and maximize returns. This idea is not only new but also has deep historical roots, dating back thousands of years before the development of modern financial markets.
The purpose of the stock investment allocation is to combine investments from different types of securities assets to maximize profits and minimize potential risks based on the investor's aspirations, profit goals and risk tolerance. The performance of financial assets depends on economic conditions, markets, government policies and political influences. The goal of an asset allocation strategy is to identify these conditions and allocate resources appropriately.
A concept closely related to asset allocation is “diversification,” which is often used interchangeably with equity capital management. An asset allocation strategy might include 50% stocks, 30% bonds, 10% commodities, and 10% cash. Diversification typically focuses on allocating capital across different asset classes, such as allocating 50% to large-cap stocks, 20% to mid-cap stocks, 20% to small-cap stocks, and 10% to international stocks. Diversification involves distributing assets across individual asset classes, which helps reduce concentration risk and increase the diversity of the portfolio.
| ASSET ALLOCATION | AVERAGE ANNUAL PROFIT | BEST YEAR | THE WORST YEAR | LOST YEAR |
| 100% stock | 12,3% | 54,2% | -43,1% | 25 of 96 |
| 80% stocks and 20% bonds | 11,1% | 45,4% | -34,9% | 24 of 96 |
| 70% stocks and 30% bonds | 10,5% | 41,1% | -30,7% | 23 of 96 |
| 60% stocks and 40% bonds | 9,9% | 36,7% | -26,6% | 22 of 96 |
| 50% stocks and 50% bonds | 9,3% | 33,5% | -22,5% | 20 of 96 |
| 40% stocks and 60% bonds | 8,7% | 35,9% | -18,4% | 19 of 96 |
| 30% stocks and 70% bonds | 8,1% | 38,3% | -14,2% | 18 of 96 |
| 20% stocks and 80% bonds | 7,5% | 40,7% | -10,1% | 16 of 96 |
| 100% bond | 6,3% | 45,5% | -8,1% | 20 of 96 |
Profit table when allocating money to invest in stocks.
3. Mistakes when allocating money to invest in stocks
Over-diversification of portfolio
Over-allocation portfolio put investors in a situation where they not only face many risks but also cannot optimize profits. When the market goes through a correction wave of 100-300 points, most stocks decrease in value, without distinguishing between basic stocks and speculative stocks. When seeing many stocks in the portfolio decrease above 10%, many inexperienced investors often change their psychology in a negative direction.
Therefore, spreading out buying and selling does not help manage risk or increase profits. Instead, investors need to be fully equipped with knowledge and experience to identify stocks with high potential for price increase, in order to maximize the profit of the entire portfolio.
Put all your eggs in one basket
On the contrary, many F0 investors put all their capital into one stock code with the desire to optimize profits to the highest level. However, when the market fluctuates, investing in the way of "putting all eggs in one basket" has many potential risks for investors. Having only one stock code in hand puts your investment portfolio at risk of a sharp decline when this business changes in a negative direction.
To limit the mistake of over-diversifying or not diversifying the investment portfolio, according to experience from Investopedia, the number of shares to be disbursed corresponds to the amount of money.
In addition to paying attention to the number of shares, investors should also consider the quality, investment type of shares, and financial situation of the business to choose assets in an attractive valuation area.
Mis-cyclical capital allocation
Uneven capital allocation over the cycle can be understood as investors not taking advantage of the growth periods of the stock market, but instead concentrating capital when the market is down to look for recovery opportunities.
According to experts OnStocks Securities, during the above discount periods Vietnam stock market, investors should only take 20-30% of capital to take advantage of short-term market recoveries, then quickly withdraw. If not, the risk of being caught up in a stronger wave of price declines will increase and it will be difficult to cut losses in time, leading to a loss of 30-50% of initial capital.
Stock investment strategy During a bear market, focus on defensive stocks and shrink your portfolio. Stocks such as consumer staples, healthcare, and utilities, or companies with balanced assets and high-quality businesses are likely to weather the downturn.
Meanwhile, when the market increases in the Bull Market phase, investors need to exploit the advantage of the upward trend by determining reasonable buying and selling points for stocks with potential to increase. At this stage, investors can use financial leverage margin at an appropriate rate to increase the ability to optimize profits. However, during the uptrend phase, there are still times when the stock market declines, but in the long term, the investment portfolio can still bring profits.
Therefore, understanding and adapting to each market form and applying strategies stock capital allocation Reasonable helps investors avoid mistakes that cause losses when buy stock.
4. Benefits of pallocate money to invest in stocks
Strategy diversify stock portfolio is widely used by many new investors as well as experienced investors today. The reason is that this strategy brings some benefits as follows:
- Timely allocation of investments: Portfolio diversification allows investors to focus on stocks and allocate investment proportions at appropriate times. As a result, they can invest in companies in many different industries. Instead of focusing on investing in stocks of the same industry, investors can now choose to invest in growing or stable industries.
- Risk Control: The market is constantly fluctuating every hour. If the market fluctuates in a negative direction, portfolio diversification can help avoid the risk of loss. In this way, investors can allocate investment capital to many different categories such as gold, foreign currency, real estate, bonds, warrants, derivatives, etc.
- Maximize returns: It is rare for an industry to rise or fall at the same time. So, not only does diversification help reduce risk, it also helps investors increase their chances of higher returns.
Source: Onstocks
