An Asset Allocation Strategy

Asset allocation refers to how investors distribute their investments among the various investment vehicles such as stocks, bonds, and cash. An asset allocation strategy is effective for many investors as, historically, different investment classes behave differently, fluctuating in different directions at different times. A big part of financial planning is in determining the asset allocation that is appropriate for the investor given their investing goals and objectives.

Factors for Consideration in Asset Allocation

The process of determining the optimal asset allocation for an investor will be is primarily driven by two factors:

The investor’s time horizon is the expected in which the investor hopes to achieve any particular financial goal.

The investor’s risk tolerance is their ability and willingness to lose any portion of their investments in an effort to achieve their investment goals.

Obviously, no one mix of assets is right for every investor as those closer to needing their money or with a lower tolerance for risk will seek predictable investments. Younger investors with higher risk tolerance will assign a premium to high returns over safety and predictability.

Asset Allocation Approaches

In developing an asset allocation strategy, there are two primary approaches to consider or discuss with an investment advisor.

Strategic Asset Allocation- a method that establishes an investment approach that utilizes a combination of assets based on expected rates of return for each asset class. By calculating the proportion of that asset class within the portfolio and the expected return of that asset class, the investor estimates the return of the portfolio.

Tactical Asset Allocation- a break from the strategic approach, tactical asset allocation is about short-term deviations from the strategic mix in an effort to capitalize on unique investment opportunities. The tactical approach adds a component of market timing to the investment strategy and seeks to exploit favorable conditions as they present themselves.

While asset allocation can as active or as passive as the investor chooses, all investors, should re-visit their investment goals and objectives on a regular basis and confirm that their portfolio is structured consistent to those.

More about asset allocation strategy

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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