Asset Allocation Asset allocation is the process of deciding how to distribute an investor's wealth among different countries and asset classes for investment purposes. An asset class is composed of securities that have similar characteristics, attributes and risk/return ratios. In other words, asset allocation defined as investing money or well diversified across different asset classes, such as stocks, bonds and money market funds. There are several risks involved in asset allocation, such as liquidity needs, time horizon, tax concerns, legal issues and regulatory factors, and unique needs and preferences. Explanation of the riska. Liquidity needs: The asset is liquid if it can be quickly converted into cash at a price close to fair market value. The investor may have liquidity needs that the investment plan must consider. For example, a 25-year-old investor probably has little need for liquidity as he focuses on his long-term retirement fund goal. These constraints may change if you face a period of unemployment or reaching your next milestone. For the 65 year old investor has greater liquidity needs.b. Time Horizon – The time horizon as a briefing on investment constraints entered into our previous discussion of short- and long-term high-priority goals. - Investors with a long-term investment horizon generally require less liquidity and can tolerate greater portfolio risk. Less liquidity because the funds are usually not needed for many years. Greater risk tolerance because any losses can be offset by profits and returns in subsequent years. - In short time horizons, favor more liquid and less risky investments because losses are more difficult to overcome in a short time frame.c. Tax Concerns – Investment planning is complicated by the tax code. Taxes complicate the situation…middle of the paper…rent products for each section. Many individual stocks, mutual funds, or index funds that meet specific asset class needs. You should also compare the costs associated with each type of investment. Index funds are a strong choice over any other asset class because they minimize costs and outperform most competitive active funds. Since they buy and sell businesses, now is the perfect time to consolidate accounts or roll over a previous employer's 401k into a rollover IRA so you have easier access to all your investments and can more easily track your progress in the future. The investor should ensure that they track the asset allocation plan as time goes by and rebalance it as needed to ensure that the portfolio maintains risk exposure for the defined investor age.References:1. Investment analysis and portfolio management, by Reilly Brown, 7° Edisio