It is common knowledge that assets in a portfolio can either gain or lose value over the time they are held, which affects the overall value of your asset allocation fund. When an asset’s value rises over time, it is said to appreciate, and similarly when an asset’s value falls over time, it is said to depreciate. When creating your asset allocation fund, the secret is to find the best-valued assets with the highest chance of appreciation. Each asset should be bought to fulfill a specific requirement within the portfolio design and its performance should be re-assessed on an on-going basis.
A new car is never a good investment as it will decrease in value as soon as you drive it off the dealer’s lot. Real estate, on the other hand, can be a great addition to your asset allocation fund because over time real estate will generally increase in value if only because of the limit amount of real estate available. Real estate, both residential and commercial should ideally be bought with a positive cash flow return from the outset and rented out on a long term lease. This helps to ensure that in times of a down turn in the property cycle, although the capital value of the asset may go down the positive cash flow from the property will cover expenses and even provide funds to purchase other properties in a depressed market.
The most common assets that individuals hold as part of their personal asset allocation funds are cash, stocks and bonds, shares, real estate, and commodities such as gold, silver and oil. All of these items tend to appreciate greatly over years of ownership.
So how does the appreciation of an asset occur? Appreciation of assets occurs for several reasons, the main one being economics: supply vs. demand. If the demand for an asset goes up and more people want it, the asset’s value will appreciate. Gold is a perfect example of this. There is only so much gold that can be mined and put into circulation. If everyone wants gold, (as you see in the current environment with the volatility on Wall Street), the value of the gold within your asset allocation fund will rise. In countries where the population does not trust the government and/or the banks, gold has traditionally been regarded as the ultimate repository of wealth.
Yes, the initial investment phase and creation of original asset allocation fund can be tedious and time-consuming. But when done correctly, the right portfolio of assets will create wealth for you for years to come. It is absolutely necessary that the investor constantly monitors his portfolio in view of the local and world situation. It is sometimes better to sell a particular asset at a loss if the situation warrants it, just to preserve capital. The concept that drives an asset allocation model is to have the overall portfolio constantly produce value while the investor monitors and adjusts it.
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