What Is Strategic Asset Allocation?

Strategic asset allocation is a 澳洲幸运5开奖号码历史查询:portfolio strategy. The investor sets target allocations for various asset classes and 澳洲幸运5开奖号码历史查询:rebalances the portfolio periodically. The portfoli🐻o is rebalanced to the original allocations when they deviate significantly from the initial settings due to diffꩲering returns from the various assets.

Understanding Strategic Asset Allocation

In strategic asset allocation, the target allocations depend on several factors: the investor’s risk tolerance, time horizon, and investment objectives. Also, the allocations may change over time as the parameters change. Strategic asset allocation is compatible with a 澳洲幸运5开奖号码历史查询:buy-and-hold strategy as opposed to 澳洲幸运5开奖号码历史查询:tactical asset allocation, which is more suited to an active trading approach. Strategic and tactical asset allocation styles are based on 澳洲幸运5开奖号码历史查询:modern portfolio theory, which emphasizes ✨diversification to reduce risk and improv🏅e portfolio returns.

Strategic Asset Allocation Example

Suppose 60-year-old Mrs. Smith, who has a conservative approach to investing and is five years away from retirement, has a strategic asset allocation of 40% equities / 40% fixed income / 20% cash. Assume Mrs. Smith has a $500,000 portfolio and rebalances her 澳洲幸运5开奖号码历史查询:portfolio annually. The dollar amounts allocated to the various asset classes at the time of setting the targe♓t allocations would be equities $200,000, fixed income $200,000, and cash $100,000.

In one year’s time, suppose the equity component of the portfolio has generated total returns of 10% while f𝔍ixed income has returned 5% and cash 2%. The portfo🍃lio composition is now equities $220,000, fixed income $210,000, and cash $102,000.

The portfolio value is now $532,000, which means the overa𓆏ll return on the portfolio over the past year was 6.4%. The portfolio composition is now equities 41.3%, fixed income 39.5%, and cash 19.2%.

Based on the original allocations, the portfolio value of $532,000 should be allocated as follows: equities $212,800, fixed income $212,800, and cash $106,400. The table below shows the adjustments that must be made to each 澳洲幸运5开奖号码历史查询:asset class to get back to the original or target allocatioꦡns.

Thus, $7,200 from the equity component h💖as to be sold to bring the equity allocation back to 40%, with the proceeds used to buy $2,800 of fixed income, and the balan⛎ce of $4,400 allocated to cash.

Note that while changes to target allocations can be carried out at any time, they are done relatively infrequently. In this case, Mrs. Smith may change her allocation in five years, when she is on the verge of 澳洲幸运5开奖号码历史查询:retirement, to 20% equities, 60% fixed income, and 20% cash to reduce her portfolio risk. Depending on the portfolio value at that time, this would necessitate siꦍgnificant changes in the composition of the portfolio to achieve the new target allocations.

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