While this is oversimplifying the process, it’s not actually very removed from a moderate asset allocation model. Fixed revenue securities are subject to elevated lack of principal during times of rising rates of interest. Fixed earnings investments are subject to varied different risks including adjustments in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and different elements. Fixed income securities are best when preservation of capital is a priority. Specifically with bonds, principal is usually returned at a set maturity date.
This strategy is often used throughout the fairness portion of a fund to move capital from overvalued to undervalued sectors, countries or regions. Doing this successfully can considerably enhance the risk-reward profile of a portfolio. There are a number of approaches to diversifying a portfolio relying on the dimensions of the portfolio, the investment goal and how actively the funds shall be managed. A very simplistic rule of thumb for diversifying your portfolio is to allocate a hundred minus your age to equities, and the rest to bonds and cash market instruments.