ASSET ALLOCATION -- INSTRUMENT FOR RISK MANAGEMENT IN THE CAPITAL MARKET.

This paper aims to point to one of the main reasons for poor performance of individual and institutional investors in the investment process. The first step that is proposed when investing is defining investment policy (Investment Policy Statement - IPS). Most individual and institutional investors in BH have no clearly defined investment policy. By respecting simple rules that the investment process involves the beginner's mistakes could have been avoided to a great extent and financial losses in investors portfolios could have been reduced as well. Practicing concept of assets allocation, mutual funds would preserve the value of assets under management in the amount of BAM 213 million for its 417,000 shareholders. Assets allocation involves making decisions about the choice between different classes of assets in the portfolio. This concept explains between 80% and 90% of portfolio performance measured by return on investment. Passivity of investment funds has led to illiquidity of the market, preventing the restructuring of the issuers at the Banja Luka Stock Exchange, the absence of support for the process of incorporation and slowing down the process of creating new financial instruments in domestic market. With adequate assets allocation investors manage and control the portfolio risk, increase yield, introduce discipline in the investment process and become "intelligent investors." [ABSTRACT FROM AUTHOR]