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5 Asset Allocation Strategies

Written by prositesfinancialMay 1 • 3 minute read

asset allocation

Every investment portfolio will need to include a mixture of different types of investments. This diversification is known as asset allocation. There are several different asset allocation models that can achieve short- and long-term goals in a portfolio.

In this article, we’ll explore some of the different strategies that might drive asset allocation in your portfolio over time. These strategies will compel the management process to adjust to changing market conditions and goals.

1. Insured Asset Allocation Strategy

An insured strategy is one in which the portfolio manager establishes a specified minimum value. If the portfolio maintains a value above this line, an active management strategy is used. This will take advantage of analytical research, experience, forecasts, and judgment to select which investments to hold, sell, and buy.

The goal is to increases the value of the portfolio above the minimum value by as much as possible. If the portfolio’s value drops below the minimum threshold, the manager will shift capital out of growth assets and into risk-free capital preservation assets. With the value of the portfolio secured, you can determine a new asset allocation strategy utilizing the preserved assets.

2. Tactical Asset Allocation Strategy

Tactical asset allocation may shift assets around temporarily to take advantage of short-term market opportunities. Once the opportunity changes, the assets will shift back into other (often lower risk) investments as dictated by the larger long-term strategy.

Tactical allocation is a short-term deviation from a longer-term strategy. This allows for increased short-term growth. It also gives managers the freedom to take advantage of opportunities that deviate from normal strategies.

With tactical asset allocation, it is crucial to know when the short-term growth opportunity has exhausted itself, and when to retreat into safer long-term positions.

3. Dynamic Asset Allocation Strategy

Dynamic asset allocation is another strategy that moves assets around to respond to changing conditions. In this case, assets are moved around constantly as certain securities rise and fall. This strategy takes advantage of changing market conditions as the economy expands and contracts. Unlike short-term deviations of tactical strategies, dynamic asset allocation is long term. It requires constant fine-tuning of the portfolio to respond to changing market conditions.

4. Constant Weighting Asset Allocation Strategy

Constant weighting stands in complete contrast to dynamic asset allocation. With a constant weighting strategy, the portfolio is allocated using a buy and hold approach. If an asset is declining in value, you will assign more to that asset to maintain a specified monetary value allocated to it. This results in buying as the market declines and selling as it expands. The portfolio remains in its current allocation until an asset changes by more than 5% of its market value. At this point, you can re-balance the portfolio to maintain the original weighting.

5. Integrated Asset Allocation Strategy

The integrated asset allocation strategy takes into account more than market factors alone. This comprehensive approach considers the changing financial goals of the portfolio owner.

Changes to risk tolerance depend on things like preference, age, or retirement date. Furthermore, it may also take into account anticipated changes in future market conditions.

An integrated asset allocation strategy may use aspects of other asset allocation strategies. However, it will not include aspects of competing strategies. For example, an integrated asset allocation strategy would not include both constant weighting and dynamic asset allocation.

Finding a Balance

Asset allocation is something that tends to be different for everyone and changes over time. It may consist of one strategy or a combination of a few different strategies. No asset allocation strategy is perfect, and they all need a great deal of knowledge of markets and investments to perform well.

Every investment advisor is different, and every portfolio will call for differences in approach. Perfection in asset allocation may be unattainable, but with knowledge and discipline, a good strategy can serve you throughout your life and help you reach your financial goals.

Do you know what asset allocation strategy you prefer and why? Feel free to share with others and discuss them in the comments below!

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