Financial Asset and Asset allocation

A financial asset is an instrument that represents an economic right or promise of future payment. The term “asset” therefore denotes a valuable resource owned by an individual, or an organization, capable of generating future economic benefits.

Its main characteristics include:

• Liquidity: The ease with which it can be converted into cash without significant loss of value.

  Liquid assets: instruments that are easily converted to cash (checking accounts, government bonds).

  Illiquid assets: assets that take longer to convert to cash (real estate, some bonds).

• Expected Return: The potential gain the investor expects, which may be in the form of dividends, interest or capital gains.

• Risk: The degree of uncertainty associated with the return of the asset, which can vary by type and market environment.

• Transferability: The ability to transfer ownership of the asset to other investors.

Examples of Financial Assets.

• Stocks: Represent shares of ownership in a company. Equity investors share in profits (dividends) and potential capital appreciation, but are also exposed to greater market risks.

• Bonds: Debt instruments issued by public or private entities. Bondholders lend money to the issuer in exchange for periodic interest payments and repayment of principal at maturity, with a generally lower risk profile than stocks.

• Commodities: Some examples are Energy commodities: Oil, Natural Gas, Coal, Uranium; or Precious Metals: Gold, Silver, Platinum, Palladium)

• Real Assets: These include properties such as land, buildings, and residential or commercial properties. These assets often offer stability and passive income through rentals, although they may be less liquid and require active management.

Asset Allocation

Asset allocation is the strategy by which an investor divides his or her portfolio among different asset classes in order to balance risk and return. That is, it is the practice of deciding where to invest and in what percentage, taking into account the investor's financial goals, time horizon, and risk appetite.

Example: An investor with a moderate risk profile might opt for an asset allocation of 50 percent in low-risk instruments (such as high-quality government or corporate bonds) and 50 percent in medium-high-risk instruments (such as stocks of established companies or mutual funds). This balance allows you to take advantage of the growth potential of the stock market while maintaining protection against losses through the bond component.

Why it is critical.

• Diversification: Spreading investments across different assets reduces the negative impact that a single asset class can have on the overall portfolio. In other words, if one category performs poorly, the others may offset losses.

• Risk/Return Optimization: Proper asset allocation takes into account the investor's risk profile, financial goals, and time horizon. This approach allows for an appropriate return in relation to the risk taken.

Asset Allocation Strategies:

• Strategic: Defines the optimal allocation of investments based on long-term goals and is maintained over time, with periodic rebalancing if necessary to return to the initial allocation.

• Tactical: Consists of short-term adjustments from the basic strategy, taking advantage of temporary market opportunities or anticipating economic changes.

• Dynamic: Provides for continuous portfolio revision in response to market changes, seeking to optimize the risk/return ratio at each stage.

In conclusion, understanding the characteristics of financial assets and applying a well-structured asset allocation strategy is essential to building a resilient investment portfolio that can adapt to market changes. This methodology enables both novices and experienced investors to manage risk in an informed way, pursuing their financial goals in a sustainable and informed manner.