Asset allocation forces you to buy low and sell high

You may not have realized the power of asset allocation unless you have studied finance.

Asset allocation means to allocate your money across different asset classes.

That means when you have $10000, you can allocate $6000 for stock, $1000 for gold, $1000 for bond, $1000 for real estate, and the remaining $1000 in cash.

That means you are following the ratio of 6 units for stock, 1 unit for gold, 1 unit for bond, and 1 unit in cash.

No matter what will happen in the future, you have to stick to this asset allocation to make it works.

When you review the portfolio a year later, you notice that the increase in share prices bring your stock to $8300. 

If the rest of the investments fall by 10%, you will have $900 in gold, $900 in bond, $900 in real estate, and the $1000 in cash remains $1000 in cash.  The total portfolio is now $12,000.  That is an increase of 20%.

The asset allocation method teaches you to stick to the 6 units for stock, and 1 unit for the rest of asset classes.

That means you have to sell some shares, so that you have the money to buy gold, bond, and real estate.

By the end of rebalancing, you will have $7200 in stocks, $1200 in gold, $1200 in real estate, $1200 in cash, and $1200 in bond.

This forces you to sell the shares to lock in gain, and make use of the low price in gold, real estate and bond for investing more.

In short, asset allocation forces you to buy low and sell high.  This is the true meaning of diversification.

While asset allocation does not allow you to make a killing by fast trading, it sure can make you richer in the long run.

This is the best strategy for busy people who do not want to spend all their time checking price, and making buying or selling decision.