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Asset allocation strategies that work

Finance

Appropriate asset mix in one’s portfolio is a dynamic process that plays a major role in determining the overall risk and return of your portfolio. Discussed here are the best allocation strategies that actually work:

Strategic asset allocation: This allocation strategy follows a “base policy mix” method that means a proportional combination of assets based on the expected return rates for each asset class. For example, is stocks are known to offer a return of 10% each year and bonds offer 5% return each year, then a mix of 50% each of stocks and bonds will offer a return of 7.5% per year.

Tactile asset allocation: Strategic asset allocation may get relatively rigid over the long run and one may find it necessary to engage in short-term tactical deviations occasionally due make the most of unusual or exceptional investment opportunities. Tactile asset allocation strategy is a moderately active strategy as the overall asset mix is returned to after the achievement of short-term profits.

 Constant-weighting asset allocation: Under this strategy, a constant rebalancing of portfolio is done. For example, if the value of an asset is declining, one purchases more of that asset. There is no definite timing for this strategy but as a thumb rule the portfolio is rebalanced to the original mix in case any given asset class moves more than 5% from its original value.

Insured asset allocation: In this, a base portfolio value is established under which the portfolio is not allowed to drop. Active management of portfolio is exercised as long as the portfolio achieves a return above its base. If the value of the portfolio drops below the base, investment is made in risk-free assets like Treasuries in order to make the base value fixed.  It is good for risk-averse investors.

Integrated Asset Allocation: This strategy involves assessment of both the risk as well as the economic expectations while establishing an asset mix. It is a broader strategy that accounts, from not only expectations but also the actual changes that take place in the capital market.

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