What are your investment goals? That’s the most important question to ask as you consider asset allocation approaches. Here we take a close look at two different investment strategies: strategic asset allocation and tactical asset allocation.
Understanding Asset Allocation
Asset allocation refers to divvying up your investments among different asset classes in a way that balances risk and reward. Exactly what your portfolio mix is—how much you have in each asset class, such as stocks, bonds, cash, and real estate—determines in large part your overall returns.
The most important thing to remember? Your asset allocation should always reflect your goals.
Strategic Asset Allocation: What It Is
Strategic asset allocation establishes a proportional asset mix based on expected rates of return and is a long-term (a decade or longer) approach. It’s based on Modern Portfolio Theory, which says that an investor can construct a portfolio that will give them optimum returns for a determined level of risk. Diversification is fundamental as a method of minimizing risk and improving returns.
How can a financial advisor help?
Your advisor will help you identify your risk tolerance and time horizon and develop an asset mix that is right for you.
Even though a strategic asset allocation is based on set targets, it does need to be rebalanced from time to time. In addition to determining initial asset allocation, your advisor will monitor and rebalance where needed to ensure that your particular allocation is always in line with your goals.
Tactical Asset Allocation: What It Is
Tactical asset allocation involves a more flexible approach and takes a short-term to medium-term view. It enables you to jump on investment opportunities as they pop up in the marketplace. Tactical asset allocation is more dynamic by nature, allowing you (or your advisor) to actively manage your portfolio to maximize profits and limit losses.
How can a financial advisor help?
Because tactical asset allocation requires discipline, a strong understanding of market timing, and educated judgments on entire markets or sectors, working with your financial advisor here is extremely beneficial.
Your advisor will have the experience to help you recognize whether—and when—you might be in a position to deviate from your original asset allocation, and will take into account everything from your risk tolerance, time horizon, required rate of return, and liquidity.
Would you like the help of a knowledgeable professional in creating a plan to help you achieve your financial goals? Learn more about our approach to portfolio management, and schedule some time to talk with one of our advisors today.
