What do you understand by asset ? Things which you own (you have) is known as assets. E.g Gold, Property, Cash, Stocks etc are example of assets. First thing you have to do is to prepare your financial portfolio and divide your current investment in to various asset class.
Once you know your investment in asset class and its value task will be quite easy. One need to put current value in terms of money in front of asset class & calculate percentage of the same. Once you know current percentage of investment in any asset class you canre modify/ optimize your investment in turn optimize asset allocation.Asset allocation is most important thing in financial management. Because each and every asset provide different return/ capital growth and it varies from asset to asset.Investment in made in gold as asset class in 2008 has grown to more than 100 % in 2011. Gold value in 2008 was approximately 11000 Rs/- per 10 gm and now it is 26000 Rs/- per 10 gm, while investment made in Indian stocks in 2008 (When value of stock was very high) has reduced by around 40 % in 2011.Sensex was 19000 in 2008 and in 2011 it is 16000. Property market in turn has grown and property price has gone up due to cost of raw material & building cost.Considering above situation if one person has allocated 20 % of his asset in property 70 % of his asset in stock and 10% in gold than over all his portfolio will be down as on today while if same person has allocated 30% of his asset in property 40 % in stock and 30% in gold than his over all portfolio as on today will be in good shape comparatively.
So you correctly understood that asset allocation in portfolio plays vital role in terms of returns and overall financial health. This asset allocation also depends upon age, income group, risk appetite and need.
Person who is young in age group of 20-30 can take more risk and hence he should invest in stock market high risk ,high return asset, while person who in age group of 50 + has to reduce his investment in risky asset and invest more in to debt instrument & fix return investment class. Consider following table which is depicted for example purpose
|Asset class||Single||With Family||Near to Retirement|
|Equities||50 %||30 %||20%|
|Fix Return||10 %||30 %||30 %|
|Gold||15 %||20 %||25 %|
|Property||15 %||10 %||10 %|
|Cash/Money Market||10 %||10 %||15 %|
Asset allocation play vital role in terms of returns and overall financial health. One should make investment in asset class after taking advice from financial adviser. Time to time one should re-look in to asset class one has invested in.