Six Approaches to Asset Allocation

Developing an asset allocation strategy is about diversifying your investments across multiple investment classes (e.g. stocks, bonds, and cash) in order to align this mix of assets with your investment objectives and risk tolerance. With proper diversification, the fluctuations in the performance of the portfolio are minimized as declines in any particular asset class would be offset by the performance of other asset classes. There are a number of strategies that can be employed in accomplishing your asset allocation strategy.

Strategic Asset Allocation: This method is used to determine the specific assets and the proportion of each within the portfolio to meet cash flow requirements and long-term investment objectives at the appropriate risk tolerance. Strategic asset allocation is about identifying and remaining consistent with a “policy mix”.

Tactical Asset Allocation: Under a tactical asset allocation strategy, investors modify their assets according to market valuations. This strategy is more active that strategic asset allocation in that the investor acts on judgments as to which securities will perform well. There is a market timing aspect to this strategy as these decisions may be driven by market and economic conditions.

Dynamic Asset Allocation: With a dynamic strategy, the investor engages in constant readjustment of the asset mix to leverage developing market conditions. This strategy is employed by hedge fund and mutual fund managers to achieve their desired exposure to emerging investment opportunities and realize the highest possible return.

Constant-Weighing Asset Allocation: The opposite of the dynamic approach, constant-weighing is about continuous rebalancing of the portfolio to maintain the desired asset mix.

Insured Asset Allocation: This is often the best choice for investors wanting to minimize downside risk by protecting their principal. The insured asset approach seeks to preserve capital by investing in fixed-income securities; returns are then directed toward stock investments.

Integrated Asset Allocation: Under the integrated asset allocation approach, the investor is mindful of risk while seeking to exploit opportunities that rise from changing market conditions. Investment decisions are made after careful consideration of each factor.

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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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