hr: Money

Establishing an appropriate asset mix is a dynamic process, and it plays a key role in determining your portfolio’s overall risk and return. As such, your portfolio’s asset mix should reflect your goals at any point in time.

Strategic asset allocation is a method that establishes and adheres to what is a ‘base policy mix’. This is a proportional combination of assets based on expected rates of return for each asset class.

Strategic asset allocation generally implies a buy-and-hold strategy, even as the shift in the values of assets cause a drift from the initially established policy mix. For this reason, you may choose to adopt a constant-weighting approach to asset allocation. With this approach, you continually rebalance your portfolio. For example, if one asset were declining in value, you would purchase more of that asset, and if that asset value should increase, you would sell it.

There are no hard-and-fast rules for the timing of portfolio rebalancing under strategic or constant-weighting asset allocation.

 
Over the long run, a strategic asset allocation strategy may seem relatively rigid.

Tactical asset allocation can be described as a moderately active strategy, since the overall strategic asset mix is returned to when desired short-term profits are achieved.

Another active asset allocation strategy is dynamic asset allocation, with which you constantly adjust the mix of assets as markets rise and fall and the economy strengthens and weakens. With this strategy you sell assets that are declining and purchase assets that are increasing, making dynamic asset allocation the polar opposite of a constant-weighting strategy.

With an insured asset allocation strategy, you establish a base portfolio value under which the portfolio should not be allowed to drop. If, however, the portfolio should ever drop to the base value, you invest in risk-free assets so that the base value becomes fixed.

You can implement an insured asset allocation strategy with a formula approach or a portfolio insurance approach. The formula approach is a graduated strategy: as the portfolio value decreases, you purchase more and more risk-free assets so that when the portfolio reaches its base level, you are entirely invested in risk-free assets.

With integrated asset allocation 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 investment risk tolerance. Integrated asset allocation is a broader asset allocation strategy, albeit allowing only either dynamic or constant-weighting allocation - obviously, an investor would not wish to implement two strategies that are competing with one another.

Whether an investor chooses a precise asset allocation strategy or a combination of different strategies depends on that investor’s goals, age, market expectations and risk tolerance.