Concentration of investments in any one asset class or sector or security is prone to high risks. At the same time, over diversifying your portfolio, is also not advisable as it dilutes returns, liquidity and monitoring capability.

Creating a proper and balanced asset allocation is the first step toward becoming a successful investor. It’s impossible to time the markets, nor you can always earn high returns by taking concentrated bets. Therefore, creating a proper asset mix is the most substantial contribution you can make to your investment performance.

That way you won’t be subject to more risk than is absolutely necessary. Below are a few steps that you can take to achieve a proper asset allocation.

Take out Your Emotions

Human emotions do play a significant role when it comes to investments. Instead of emotions, following  factors should determine your investment strategy.

• Your personal circumstances: These are your marital status, job security and debt levels. Each one will reflect the amount of risk you can afford to take with your investments.
• Your goals: Here you need to define your investment goals. Is it for your children education, retirement, early retirement or some other purpose? The goal can affect how you invest.
• Your time horizon: What Is your investment horizon? Is it 30 years or just 10 years? That will affect the amount of risk you can take.

Consider each of the above factors in determining how much risk you want to take with your investments, then make your asset allocations accordingly. For example, if you’re single, have a stable job, low debt levels and you’re planning to retire after another 30 years, then risk should not bother you. You can consider putting 70% to 80% of your investments in high risk-type assets like stocks and funds.

Go for proven asset classes

A large part of your money should be invested in proven asset classes like index funds or large cap funds and in income- generating assets like bonds and rent- yielding properties. A small part of your money can be invested in the ever-green asset class of gold or gold funds.

Diversify within the specific asset class

In addition to including various asset classes in your investment portfolio, you should also plan to diversify within each asset class.

Stocks: Though index funds and large cap funds tend to be the best all-weather stock investments, you can diversify your equity exposure further by spreading your money across various promising sectors, which have the potential to outperform the general market. For example, the defense sector could turn out to be a dark horse in an emerging power like India.

Bonds: If you are holding corporate bonds, you may diversify by adding treasury securities and government bonds. It’s also a good idea to stagger bond maturities, which will give a better hedge in a changing interest rate environment.

Add some alternative investments

Alternative investments could be like an icing on a cake. In addition to stocks, bonds and property, you should also seriously consider some alternative investments.

These are less traditional types, but they are the type that can do extraordinarily well in certain types of markets. Precious metals, Crypto Currencies, REITs, Art, Angle funding in Start-Ups etc are some of alternative investment opportunities.

By precisely spreading your money across different asset classes and across different investments within each class, you establish yourself as a long-term investor.