Asset Allocation Strategy

Asset allocation strategy is an investment approach to balance the rewards and risks by allocating the assets into different asset classes such as bonds and stocks.

Asset allocation emphasizes on the fact that the assets perform differently each year and although it is difficult to predict which asset will perform the best in a particular year, it is tempting and risky to make such predictions. Setting up an appropriate asset mix is an important process which determines the portfolio’s risk and returns. Various strategies can be adopted to outline the asset allocations such as:

The Strategic Asset Allocation that determines the base policy mix. This strategy is a relative grouping of assets that are based on the anticipated rates of return of each asset class. Putting in terms of figures it would mean that if stocks have returned 10% per year and the bonds have 5% per year then mix of 50% of each, stocks and bonds, can have an anticipated return of 7.5% per year.

The Constant-Weighting Asset Allocation strategic approach ensures that you constantly rebalance the portfolio. A strategic asset allocation often involves the buy-and-hold strategy despite the drift from the initial policy mix, which is caused by a shift in the asset value. So if you would buy an asset whose value is declining and will sell it when the value of that asset goes up.

The Tactical Asset Allocation is a reasonably active strategy in which asset mix is returned to when the expected short-term profits are achieved. This strategy may be considered as an alternative to the strategic asset allocation strategy as it can be fairly rigid. It requires some degree of discipline since one must be able identify the course of the short-term opportunities and then rebalance the portfolio to the long-term asset position.

The Dynamic Asset Allocation allows one to constantly adjust the mix of assets depending upon the fluctuations in the market and the economy. In this strategy one sells assets which are declining on the other hand purchases assets that are increasing. So if the stock market is weakening then you sell the stocks expecting further decline while if the market is going strong then you purchase stocks in anticipation of further growth.

There are various other asset allocation strategy that an investor can adopt and this can be an active or a passive process. The investor can choose a precise strategy or adopt a combination of strategies depending upon goals, age, market expectations and risk tolerance.