Creating your ideal asset allocation strategy requires a mix of investments that range from safe to aggressive. Allocating your money based on your goals, life stage, and risk tolerance can help you maximize your portfolio.
For most investors, approaching asset allocation is more important than selecting the right individual stock. Moreover, the goal is to get the right mix of investments without hurting your returns. By trusting in the market over individual stock impulses, you should steadily reach your goals.
What Is Asset Allocation?
Asset allocation means that you are spreading your investments into multiple asset classes. There are three main asset classes (equities, fixed-income, and cash equivalents), and other alternative assets (real estate, commodities, antiques, and much more).
In the simplest terms, asset allocation is how you diversify your portfolio across the various investment vehicles. When you find the right mix, you better control the risk of your portfolio.
Why Should You Be Aware of Asset Allocation?
All investors should be aware that asset allocation is an important tool for your portfolio. More importantly, strategy allows you to minimize your losses, while you can still benefit from potential gains.
Because most investors started investing for the same reason, to build wealth, you all have one thing in common: to get the most out of your investments to reach your goals. Moreover, when you add asset allocation within your portfolio, you minimize the risk of volatile stocks, while still allowing for potential growth.
6 Best Asset Allocation Strategies
There is no one-size-fits-all strategy to balance your investment portfolio. After all, everyone has different investment goals and risk tolerance, so you should choose the asset allocation strategy that is right for your specific needs. Moreover, if you are unsure of which is the right fit, you can reach out to your financial advisor for guidance.
1. Strategic Asset Allocation
The first asset allocation strategy is strategic asset allocation. In this strategy, you adhere to a “base policy mix” – which is a combination of assets that are proportional based on their expected rate of return under each asset class.
For example, if you have previously invested in bonds that return 5% annually and stocks that return 10% annually, a mix of 50/50 will provide you with an expected return of 7.5% annually. Consider this strategy as being on “auto pilot” after you have set your initial portfolio.
- Strategic asset allocation is easy to maintain
- It is more suited to long-term investors who do not want to constantly be worried about adjusting their portfolio
- If you prefer an active trading approach, another asset allocation strategy might be better suited for you
- This approach also only considers your personal profile and not outside factors that could influence strategic investing opportunities
2. Constant-Weighting Asset Allocation
Unlike the above example of strategic asset allocation, constant-weighting asset allocation is an approach where you constantly rebalance your portfolio.
With constant-weighting asset allocation, if an asset is losing value but there’s confidence that over time it will be profitable, you would acquire more of that asset to profit more in the long run. This strategy capitalizes on opportunities to secure as much profit as possible.
- If you appreciate a moderately active portfolio, this is a highly flexible option
- With this approach you can increase the value of your asset by taking advantage of assets that may be of value, then selling investments when they hit their targets
- With constant-weighting asset allocation you will be constantly rebalancing your portfolio
- If you prefer to not be as hands on, this is not the ideal strategy for you
3. Tactical Asset Allocation
Tactical asset allocation is a strategy that deviates from the long-term investment strategies. It aims at maximizing short-term strategies by taking advantage of market pricing anomalies or market sectors that are strong. Because of the work required to be successful, it is considered a moderately active strategy.
- With the digital age, investors can easily move assets with ease
- This strategy allows you to take advantage of market volatility
- Tactical asset allocation helps you see significant short-term gains
- Because this is a moderately active strategy, this approach can be tricky for investors who are not as knowledgeable (You will need to do more work and research compared to other asset allocation strategies)
- It also should be noted that the more active you are, it could trigger more commission fees (You should keep track of your fees to make sure you are calculating your true returns properly)
4. Dynamic Asset Allocation
With dynamic asset allocation investors adjust their asset proportions based on the market highs and lows and the economy. It is the most popular asset allocation investment strategy.
It is an aggressive form of investing where you continually adjust the mix of your assets. If stocks are surging, you would buy more stock instead of other asset classes to take advantage of the potential gains.
- The frequent adjustment with a dynamic asset allocation strategy allows you to see higher returns within your portfolio and can prevent losses
- It his a highly flexible strategy that can respond quickly to risks and market changes
- With this strategy you will need to pay close attention to emerging market trends (this requires time, skill, and knowledge)
- You should also pay attention to the transaction costs associated with the constant buying and selling, which could impact your overall returns
5. Insured Asset Allocation
If you are an investor that is risk averse, or close to retirement, utilizing an insured asset allocation strategy might be ideal. This strategy involves the investor setting up a base portfolio value that it is not allowed to drop below. If the portfolio is achieving returns above the base value, you continue the path.
However, if the portfolio drops below your set base value, you invest in risk-adverse assets (like treasuries) to fix the base value. You would then work with your financial advisor to reallocate your assets.
- This asset allocation strategy is ideal for investors who desire to have an active portfolio, but also appreciate security
- There is the guarantee that your portfolio is designed to not decline, which is suitable for investors who are close to or currently retired
- If you prefer higher-risk/higher-reward investment options, this solution might be too conservative for your investment style
6. Integrated Asset Allocation
Out of all the strategies, integrated asset allocation is one of the most complicated. For this reason, it should be left to savvy investors who are comfortable with complex trading strategies.
It creates a mix of assets based on changes in capital markets, your personal economic expectations, and risk tolerance. The goal of this strategy is to utilize a mix of the above-mentioned asset allocation strategies, with your risk tolerance in mind, to optimize your net worth.
- This is one of the most personalized asset allocation strategies. It starts with your future in mind, then develops a comprehensive plan to reach your goals.
- This strategy is complex and should not be done by new or inexperienced investors
- It requires an in-depth understanding of all the other asset allocation strategies, along with understanding risk tolerance
Develop Your Asset Allocation Strategy With a Financial Advisor
Planning your portfolio with the right mix of asset allocation can be complicated. It requires the right mix of assets to ensure your future wealth meets your needs.
When you work with a financial advisor, they can prepare asset allocation strategies that help you reach both your short- and long-term goals. You can invest without the stress of making all the decisions on your own when you turn to an advisor that understands your needs.