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What Are the Different Types of Asset Allocation Tool?

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  • Written By: Geri Terzo
  • Edited By: PJP Schroeder
  • Last Modified Date: 07 November 2016
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    Conjecture Corporation
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Asset allocation itself is a tool to construct a diversified investment portfolio in the financial markets. An asset allocation calculator is a type of tool that can be used to make sure an investor has the appropriate exposure based on financial goals. Charting and graphing can also be used to illustrate the way that an investment portfolio is allocated by percentage.

Institutional and individual investors alike often pursue diversification in a portfolio, and an asset allocation tool can help to achieve that mix. Investing in only one asset class, or category of investment, can limit potential returns and also introduce unnecessary risk to the portfolio. Asset allocation is the practice of dividing assets across different categories. Some of the groupings include equities, or stocks, debt, or bonds, and commodities. Each of those categories can be drilled down even further by size, region, or risk level.

When determining the expected value of a portfolio in the future, an asset allocation calculator can be especially useful. Calculating someone's anticipated retirement benefit is one scenario where this type of asset allocation tool would be needed. Users must enter in the amount of money invested in each individual asset class. The tool goes on to calculate what that investment mix will be worth in a given period of time based on historical returns in the financial markets. This asset allocation tool may be found on the Internet.

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Certain asset allocation calculators are more detailed than others. Some might ask for more information in the required fields so that the results and investment recommendations are somewhat tailored. Risk tolerance may be a measurable component on one calculator, and it determines the amount of volatility that an investor can handle and the severity of market declines that can be afforded. A person's age will impact the recommended asset allocation mix increasingly as an investor ages and nears the time when an investment portfolio may be needed for income.

A pie graph can be a useful asset allocation tool. With a quick glance, an investor can see by color which category is dominating a portfolio and where there may be room for adjustments. To support this type of asset allocation tool, it may be helpful to create an actual asset allocation chart and a target asset allocation chart so that an investor can compare actual investments with what the desired allocations are.

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