What is strategic asset allocation?

Definition:

Strategic asset allocation is an investment strategy that helps you determine the percentage of assets that should be in stocks, bonds, and cash. Once you decide on a specific allocation, you should stick to that allocation for several years.

How does it work?

There are many asset allocation models, all depending on risk tolerance. If you’re unsure about which investments to choose and how much to invest in them, there are many online tools that can help you. You can also talk to a financial advisor for detailed and personalized advice. Whether you find a questionnaire or an online calculator or visit an advisor, they are all designed to measure your comfort level with risk, which can then be translated into an appropriate asset allocation.

Maintaining asset allocation

Once you decide on your asset allocation strategy, you need to maintain it. Don’t just set it and forget it. You should review your portfolio regularly to ensure it remains aligned. You may want to rebalance on a predetermined schedule (e.g., annually) so that if any part becomes misaligned, you can restore the original allocation.

Strategic asset allocation vs. Tactical asset allocation

Strategic asset allocation relies on a more passive investment approach, while tactical asset allocation involves a more active approach. The best method for you depends on your investment style.

When does strategic asset allocation work?

The strategic asset allocation approach may be suitable for you if the following criteria apply:

• You prefer to be non-intrusive: With this approach, you buy investments at a certain allocation and rebalance (buy some and sell others) only when the allocation deviates from that allocation.
• You want to buy and hold: You will buy investments and hold them for the long term. This means you rarely have to move money around or incur related transaction fees.
• You have a long time frame: The longer you have until you need the money in your portfolio, the more appealing this method becomes, as there is still enough time for the market to recover from potential downturns.
• You have limited investment experience: This method requires some research but does not require deep insights into market trends. You may want to choose this approach if you lack the expertise to react to ongoing market events.
• You are an emotional investor: Strategic asset allocation forces you to stick to your original asset distribution, no matter what happens in the market. If you identify as an impulsive shopper or panicky buyer (or seller), strategic asset allocation will help mitigate subsequent trades.

When does tactical asset allocation work?

The tactical asset allocation approach may be suitable for you if the following criteria apply:

• You desire greater control: If you do not trust the market to guide your investments in the right direction, prefer to maintain control over your trades, and want to retain the right to make your trading decisions, this approach may be a better option.
• You are willing to trade frequently: Unlike the buy-and-hold strategy, the tactical approach involves continuously monitoring investments and acting on investment opportunities as they arise. This may lead to more frequent movement of money, which can result in higher transaction fees.
• You have a short to medium time frame: The tactical approach may be more suitable for funds in a regular investment account that you wish to increase over the short term rather than a specific long-term goal.
• You have more experience: If you have substantial insights into the market and know how to act wisely in changing conditions, this option may be suitable for you. However, there is no guarantee that you will achieve better results than with strategic asset allocation.

Does

Do You Need Strategic Asset Allocation?

Your investment strategy will depend on a number of factors, including:

• Your investment goals timeline
• Your risk tolerance
• Your comfort level with making investment decisions

Strategic asset allocation is an ideal choice for the investor who wants to buy and hold and may not have extensive investment experience and prefers a hands-off approach to saving for long-term retirement goals. Investors who prefer to actively manage their investments over a shorter time frame should consider a tactical asset allocation strategy.

You may have the same risk tolerance throughout your life, meaning that your comfort with volatile markets at the moment will remain the same as you age. However, when the time comes to withdraw money from your investment account, you may want to reduce your exposure to risk because you have less time to recover investment losses during a downturn.

If you’re unsure whether strategic asset allocation is right for you, consult a financial advisor.

How Do You Get Strategic Asset Allocation?

Follow these steps to create a portfolio that fits your investment profile:

• Determine your risk tolerance: This is how much volatility you can handle. If you can stay calm when the market drops, you might be able to be bolder by putting more money in stocks. If you tend to worry during downturns, you might want to invest more cautiously by increasing bonds or cash.
• Consider your time frame: How long do you plan to hold your investments? If you don’t think you’ll need the money for a long time, you can afford to be bolder. Generally, the longer your time frame, the less you worry about the high volatility that comes with a bolder allocation.
• Know your objectives: Is your goal capital growth, income generation, or a mix of both? Growth typically requires a bolder investment allocation, while income requires a more conservative approach.
• Determine your allocation: The asset categories include cash, bonds, and stocks. Look at the expected long-term returns and risk level of each asset class when deciding on the target percentage for each category. Stocks are the riskiest, bonds are less risky, and cash is the least risky. The greater the risk, the greater the opportunity for growth and loss.
• Break down each asset class: Stocks, for example, can be broken down into large-cap and small-cap, U.S. and international, and emerging markets, to name a few subcategories.
• Make a plan: Assign a target percentage to each major asset class. For example, decide to allocate 10% to small-cap U.S. stocks.
• Buy funds: You can purchase several individual funds to form the planned allocation collectively. Alternatively, you can rely on a fund that does the work for you. For instance, you could buy a balanced fund, which includes both stocks and bonds in one fund, typically in fixed proportions (e.g., 60% stocks / 40% bonds). Many 401(k) plans also offer “model” portfolio allocations that do the work for you.

Source: https://www.thebalancemoney.com/what-is-strategic-asset-allocation-2388300