Strategic Asset Allocation is an investment strategy that involves setting target allocations for various asset classes, and periodically re-balancing the portfolio back to the original allocations when they vary significantly from the initial settings due to ongoing changing returns from various assets.
Many people may look at a host of ETF’s or Mutual Funds and choose, let’s say, 25%, 25%, 25% and 25% and consider that to be strategic asset allocation. Nothing could be further from the truth or more dangerous.
Asset classes have differing rates of return and differing rates of risk or “volatility”. Due to this the S&P 500 may be a wonderful index to be invested in when things are good but very scary when things are bad even though it consists of 500 of the largest companies in the United States and even the world. Add to this riskier asset classes like small growth stocks, emerging markets or some growth real estate and a portfolio could potentially get quite volatile – or would it?
Often times more risky asset classes also move in different directions at different times. Whereas the Dow and the S&P 500 often move very similarly, the S&P and certain emerging markets indexes may move very differently. By adding these two asset classes together in a portfolio volatility may be dampened instead of increased while returns may be enhanced. Then, as opposed to having 50% S&P and a 50% emerging market index added, it might be better to allocate 40% S&P 500 and 40% emerging markets in the portfolio to target the correct return.
Add to this that from 1 (basically no risk) to 100 (extreme risk), portfolios can be arranged in many asset classes to target certain rates of return and risk or volatility based on the investors feelings about risk, time frame to goal and the goals specific intentions, which may change over time.
Strategic asset allocation is compatible with a “buy and hold” strategy, whereas tactical asset allocation which may be more specifically compared to a more actively traded type of approach.
Strategic and tactical asset allocation are based on modern portfolio theory, which emphasizes diversification so as to reduce risk and try to improve portfolio returns.
At AmericasRetirementPlan.com from RFG Global Asset Management, we primarily use strategic asset allocation to target and create portfolios which have a risk factor of between 25 to 85. We measure risk using tools such as Riskalyze and model the portfolios to target the propr risk based on your stated goals.
That being said, there are times when global events and the technical analysis we perform may indicate a more aggressive or less aggressive approach to the models we design for clients. This being the case, models for our clients may be up to 5 points more aggressive or 5 points more conservative than the stated goal so as to take advantage of markets we see as being positive and advancing or being more cautious in potentially declining markets. Anything more than 5 points from the target may not result in a proper outcome based on our years and even decades of experience.
Ok, all that being said, our primary goal is to use strategic asset allocation with an up to 5% variance depending on certain world events and technical analysis of the markets. By doing this, we keep the portfolio precisely tuned to your goals, needs and goal based outcomes. So nice!