From an investor perspective, asset allocation and acquisition is one of the most important decisions a business can make. Whenever the decision to purchase a new asset or transfer assets from one class to another needs to be made, it is best to seek financial advice from an accounting firm with experience in that industry. Businesses need to be shown how to calculate the risk/reward ratios up against the companies goals. What is your long term investment goal? How much risk are you willing to make? What timeframe are you looking to hold the asset?
There are three main asset classes: Fixed income, Equities, Cash and equivalents
Depending on your risk tolerance, timeframe, and company goals, where to allocate assets will be different for a number of reasons.
To better understand we can use an example. An individual that is wanting to retire in 5 years may invest in more short term investing strategies such as bonds, certificates of deposit, and low risk stocks. Due to the short nature of their investment it becomes too “risky” for that individual to invest in a small cap aggressive growth mutual fund that may ride ups And downs in the market.
A person wanting to retire in 30 years may have a different strategy for investing. When you have time on your side you can make riskier investments such as real estate and small cap startup stock investments. The money used in this example is not needed for many years so it can be tied up and wait out a down market whereas a 5 year plan just doesn’t have the time necessary to recover after a downturn.
Your business should be treated in a similar way. If your business is looking to purchase a new asset they must look at the variables of risk, timeframe til maturity, and long term investment goals.
North Star Tax and Accounting can help guide your business through the difficult task of asset allocation, investments, and asset purchases.