Asset allocation is a very important part of building and balancing your investment portfolio. After all, it is a major factor that determines overall returns, even more so than the choice of individual stocks. combining stocks, bonds, cash and real estate in your portfolio is a dynamic process. So the asset mix should reflect your goals at all times.
Below we have described several strategies for establishing asset allocation, with a look at their basic management approaches.
Asset allocation is very important in creating and balancing a portfolio.
All strategies should use an asset mix that reflects your objectives and should take into account your risk tolerance and investment time frame.
A strategic asset allocation strategy sets goals and requires rebalancing from time to time.
This method establishes and respects a core policy mix, a proportional mix of assets based on the expected rates of return for each asset class. Risk tolerance and investment timing should also be considered. You can set your goals and then rebalance your portfolio from time to time.
A strategic asset allocation strategy can be similar to a buy-and-hold strategy and also strongly suggests diversification to reduce risk and enhance returns.
For example, if stocks have historically yielded 10% per year and bonds have yielded 5% per year, a mix of 50% stocks and 50% bonds should yield 7.5% on the year.
But before you start investing, you should first read whether you can make money on stocks.
Strategic asset allocation generally involves a buy-and-hold strategy, even if changes in asset values lead to a drift from the initially established policy mix. For this reason, you may prefer to take a constant weighting approach to asset allocation. With this approach, you continually rebalance your portfolio. For example, if an asset loses value, you will buy more of it. And if the value of the asset increases, you sell it.
There are no hard and fast rules for the timing of portfolio rebalancing under strategic asset allocation or constant weighting. But a general rule is that the portfolio should be rebalanced to its original composition when a given asset class deviates more than 5% from its original value.
Over the long term, a strategic asset allocation strategy can seem relatively rigid. Therefore, it may be necessary to occasionally engage in short-term tactical deviations from the mix to capitalize on unusual or exceptional investment opportunities. This flexibility adds a marketing component to the portfolio, allowing you to participate in more favourable economic conditions for one asset class than for others.
Tactical asset allocation can be described as a moderately active strategy, as the overall strategic asset mix is restored when the desired short-term benefits are achieved. This strategy requires some discipline, as you must first be able to recognize when short-term opportunities have run out and then rebalance the portfolio back to the long-term capital position.
The asset mix in your portfolio should reflect your goals at all time
Another active asset allocation strategy is dynamic asset allocation. With this strategy, the asset mix constantly adjusts as markets rise and fall and the economy strengthens and weakens. With this strategy, you sell declining assets and buy rising assets.
Dynamic asset allocation is based on the judgment of a portfolio manager rather than a target mix of assets.
This makes dynamic asset allocation the opposite of a constant weighting strategy. For example, if the stock market is showing weakness, you sell stocks in anticipation of further declines, and if the market is strong, you buy stocks in anticipation of continued market gains.
With a secured asset allocation strategy, you define a base portfolio value below which the portfolio must not fall. As long as the portfolio is performing above its base, you are actively managing, using analytical research, forecasting, judgment and experience to decide which stocks to buy, hold and sell to increase the value of the portfolio as much as possible. possible.
If your portfolio ever drops to the base value, invest in risk-free assets, such as treasury bills (especially treasury bills) so that the base value becomes fixed. At this point, you should consult your advisor to reallocate assets, or even change your investment strategy altogether.
Insured asset allocation may be suitable for risk-averse investors who want some level of active portfolio management but appreciate the security of establishing a guaranteed minimum level below which the portfolio cannot fall. For example, an investor who wants to establish a minimum standard of living in retirement may find an insured asset allocation strategy that is well suited to their management objectives.
with the allocation of asset assets, is considered your economic expectations and the risk of putting in place a mix of resources.
