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.
What is strategic asset allocation?
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.
How does strategic asset allocation work?
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:
Financial goals & time horizon
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.
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 & correlation
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.
Costs & fees
Factor in the costs associated with your investments, including management fees, transaction costs and
Determine how often you will
Timing the market:
Is it a good idea?
Is it a good idea?
What does strategic asset allocation look like in practice?
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%.
Landing on the right asset allocation for you
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