Different Asset Allocation Strategies for Beginners


Asset allocation is all about having the right mix of assets. It’s all about having enough stocks, bonds, and even real estate on your portfolio. It’s a dynamic process that plays a crucial role in finding your portfolio’s overall risk and return.

Asset allocation written on a colored mini-chalkboard

Therefore, it’s important that the asset mix is in line with your goals at any point in time. Below, we list down different strategies for establishing asset allocations. Check them out.

Strategic Asset Allocation

This method establishes and follows the “base policy mix,” which is a proportional combination of assets based on expected rates of return for each asset class.

For instance, if stocks have historically returned 10 percent per year and bonds have returned 5 percent per year, a mix of 50 percent stocks and 50 percent bonds would be expected to return 7.5 percent per year.

Constant-Weighting Asset Allocation

Strategic asset allocation in general implies a buy-and-hold strategy, even as the shift in values of assets triggers a deviation from the initially established policy mix.

And because of this, you might want to choose a constant-weighting approach to asset allocation. With this style, you regularly rebalance your portfolio.

For instance, if one asset is seen slumping in value, you would purchase more of that asset, and if the asset’s value is increasing, you would sell it.

There are really no strict rules when it comes to timing portfolio rebalancing under strategic or constant-weighting asset allocation.

On the other hand, it is generally advised that the portfolio is rebalanced to its original mix when any given asset class moves more than 5 percent from its original value.

Tactical Asset Allocation

Over the longer haul, a strategic asset allocation strategy may not seem flexible. As a result, you may find the need to occasionally engage in short-term, tactical deviations from the mix to take advantage of unusual or exceptional investment opportunities.

This kind of flexibility adds a market-timing component to the portfolio, allowing you to participate in economic conditions more favorable for one asset class than for others.

Tactical asset allocation is somehow a moderately active strategy, since the broader strategic asset mix is returned to when the target short-term profits have been achieved.

This strategy demands some discipline, as you must first be able to notice when short-term opportunities have lost their steam and then rebalance the portfolio to the long-term position.

Dynamic Asset Allocation

Another active asset allocation strategy is dynamic asset allocation, with which you frequently tweak the mix of assets as markets increase and decrease, and as the economy strengthens and weakens.

Using this strategy you sell assets that are declining and purchase assets that are increasing. Of course, this makes the dynamic asset allocation strategy the exact inverse of the constant-weighting strategy.

For instance, if the stock market is showing weakness, you sell the stocks as you expect further weakness in the future. And if the market is showing strength, you buy more as you expect further gains.

Insured Asset Allocation

Using an insured asset allocation strategy, you establish a base portfolio value under which the portfolio should not be allowed to drop.

As long as the portfolio attains a return that lies above its base, you exercise active management using analytical research, forecasts, and judgment. You also decide what securities to buy, sell, and hold, with the goal of increasing the portfolio value as much as possible.

If, on the other hand, the portfolio should ever slip down and under the base value, you then invest in risk-free assets like Treasury bills so that the base value becomes fixed.

Insured asset allocation may be suitable for risk-averse investors who want a certain level of active portfolio management but appreciate the security of setting up a guaranteed floor below which the portfolio is not allowed to decline.

For example, if you wish to establish a minimum standard of living during retirement, you might search for an insured asset allocation strategy ideally suited to your management goals.

Integrated Asset Allocation

With this asset allocation model, you consider both your economic expectations and your risk in establishing an asset mix.

While all of the above-mentioned strategies take into account expectations for future market returns, not all of the strategies account for all strategies, accounting not only for expectations but also actual changes in capital markets and your risk tolerance.

Integrated asset allocation is bigger asset allocation strategy. Bear in mind, however, that it cannot include both dynamic and constant-weighted allocation, since, quite obviously, you wouldn’t be able to implement the two strategies along with one another.

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