Final answer:
When selecting asset allocation for a portfolio, it is important to consider risk tolerance and effort applied. Risk tolerance refers to the ability to handle potential losses and fluctuations in investments, while effort applied refers to the level of involvement in managing investments.
Step-by-step explanation:
When selecting your asset allocation for your portfolio, it is important to consider your risk tolerance and how much effort you are willing to apply. This means assessing how comfortable you are with taking risks and the amount of time and energy you are willing to invest in managing your investments.
Risk tolerance refers to your ability to handle potential losses and fluctuations in the value of your investments. If you have a low tolerance for risk, you may prefer a conservative asset allocation with a lower potential for returns but also a lower risk of losing money. On the other hand, if you have a higher risk tolerance, you may be willing to take on more volatility in exchange for potentially higher returns.
Considering how much effort you are willing to apply refers to the level of involvement you want to have in managing your investments. Some investors prefer a more hands-on approach, regularly reviewing and adjusting their portfolio. Others may prefer a more passive approach, where they rely on professional managers or select diversified funds that align with their investment objectives without needing to make frequent changes.