Question

Explain the difference between "diversification" and "asset allocation". If you have $1,000 for asset allocation, what assets would you purchase at your current life stage (dependent or independent) and why would you choose those assets?

Answer 1

Difference between diversification and asset allocation:

While asset allocation and diversification are often used in the same sentence, they are very different strategies. Diversification in investing reflects the amount of same asset class holdings in your portfolio. For example, of your stock asset class holdings, do you own five stocks or 500 stocks? The larger the number of holdings, the more diversified your position.

Asset allocation is the way in which those assets are distributed within your portfolio to align with your goals and objectives. This allocation is based on age, risk tolerance, income needs, asset base, and more. Asset allocation is typically measured in percentages according to the asset classes in which your money is invested.

Diversification strategies are implemented hand-in-hand with asset allocation strategies to offer clients exposure to risk that fits their risk tolerance while minimizing downside potential due to the faltering of one or more individual holdings.

If I have $1000 then I would like to purchase a plot of land or a building or a room because these assets do not depreciatie over time they tend to appreciate.