Strategic asset allocation: A guide for investors

As you build your investment portfolio, you'll need to decide exactly how you want to allocate your assets. Different types of investors lean toward certain strategies, depending on their risk tolerance and their short- and long-term financial goals.

One type of strategy, strategic asset allocation, lets you take a more passive, future-view approach to managing your money. Let's walk through the basics so you can decide if this strategy fits you.

Asset allocation is all about creating a portfolio of different assets so you can achieve financial goals while managing risk. Strategic asset allocation differs from another common approach, tactical asset allocation, because you take a long-term view rather than frequently changing holdings. You set target allocations for various types of assets, such as stocks, bonds, cash and real estate, and stay aligned with your goals by periodically rebalancing your portfolio.

This strategy encourages investors to stay disciplined and stick to their predetermined asset allocation, regardless of short-term market fluctuations. Because of its structured, buy-and-hold approach to portfolio management, this strategy may work best for investors with goals further down the road.

The primary framework for this strategic type of asset allocation includes defining your financial goals and when you want to achieve them, assessing your risk tolerance, and understanding asset classes and tax considerations.

Before you land on your chosen asset allocation strategy, it's worth discussing these factors with your financial advisor:

Clearly define your short-term and long-term financial objectives. Are you saving for retirement, education or a major purchase? Your time horizon—the period over which you plan to invest—will influence your asset allocation. Longer time horizons may allow for a higher allocation to riskier assets like stocks, while shorter time horizons may lean toward more conservative investments.

Assess your risk tolerance and comfort level with market fluctuations while considering your investment knowledge and experience. Understand how much volatility you can endure without making emotional or impulsive decisions. Your risk tolerance will affect how much of your portfolio you allocate to more volatile assets like stocks versus more stable assets like bonds.

Determine which asset classes, such as stocks, bonds, cash, real estate and commodities, you want to include in your portfolio. The allocation to each asset class will depend on your goals, risk tolerance and market outlook. Also consider the historical performance and potential future returns of different asset classes. Keep in mind that historical performance is not a guarantee of future results.

Evaluate the current economic and market conditions. Different asset classes may perform differently under various economic scenarios, such as economic expansion, recession or inflation. Consider how your chosen asset allocation might perform under these conditions.

Diversification involves spreading your assets across different types of investments, which can help reduce overall portfolio risk and mitigate losses during market downturns.

Think about the tax implications of your asset allocation decisions. Some assets may have different tax treatments, which can affect your after-tax returns. Tax-efficient asset allocation—placing tax-inefficient assets in tax-advantaged accounts—can help you spread your tax liability over time.

Factor in the costs associated with your investments, including management fees, transaction costs and expense ratios. Minimizing costs can enhance your overall returns. Employing a strategic asset allocation strategy can help to reduce costs as trading is typically limited to periodic rebalancing. This is compared to tactical asset allocation, which often has higher trading related to attempts to take advantage of movements in the markets or other tactical strategies.

Determine how often you will rebalance your portfolio to maintain your target asset allocation. Regular rebalancing ensures that your portfolio remains aligned with your desired risk profile over time.

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Timing the market:
Is it a good idea?

You may be familiar with the adage that "time in the market beats timing the market." Many investors—and investment advisors—advocate for the idea that a buy-and-hold strategy is more advantageous in the long run than continually buying and selling based on market predictions.

Dive deeper

How would your investments look if you go with a strategic approach? Here's a strategic asset allocation example, based on a hypothetical investor's profile and allocation mix.

• Age: 40
• Financial goal: Retirement in 20–25 years
• Risk tolerance: Moderate
• Investment horizon: Long-term
  

• Equities (stocks): 60%
  
  • U.S. large-cap stocks: 40%
  • International stocks: 20%
• Fixed income (bonds): 35%
  
  • U.S. government bonds: 20%
  • Corporate bonds: 15%
• Cash and cash equivalents: 5%

Given the investor's moderate risk tolerance and long investment horizon, a significant portion (60%) of the portfolio is allocated to equities, and 35% is allocated to fixed income (bonds), which provides a balance of risk and diversification. A small portion (5%) is allocated to cash and cash equivalents, which provide liquidity for short-term needs while preserving capital.

Rebalancing to your portfolio to these initial percentage targets helps you to remain within your desired risk profile. Some investors rebalance on a set schedule, such as annually, while other investors rebalance when broad market movements result in your portfolio allocation deviating from its target percentages by a certain amount, such as 5% or 10%.

A strategic portfolio management approach can work well for long-term investors with a buy-and-hold mindset. It differs from a tactical asset allocation approach, which is geared toward active management and short-term investment moves.

Regularly reviewing and rebalancing your asset allocation is essential for successful portfolio management. Consider seeking guidance from a Thrivent financial advisor, who can help you create a strategy based on your unique circumstances and financial goals.