Strategic asset allocation is a traditional approach to determining how much of your money should be where in order to achieve your long term investing goals. It starts with assessing your tolerance for risk, and your investing time frame.
Once your risk tolerance and time frame are understood, a recommended allocation is devised by creating an allocation of investments that, when combined, should match the long term returns and risk tolerance that you desire.
Strategic asset allocation approaches determine how much of your money should be in each asset class by looking at the long term expected returns and risk levels of each asset class.
Then a recommendation is made as to how much of your money should be in cash, bonds and stocks, for example. Each asset class is also broken down into additional categories; stocks for example would be broken down into large cap, small cap, U.S., international or emerging markets, just to name a few sub-categories.
What Does A Strategic Asset Allocation Look Like?
A strategic asset allocation recommendation might suggest that you have 70% stocks/20% bonds/10% cash, or 60% stocks/40% bonds. You might see such an allocation referred to as a “70/20/10” portfolio or a “60/40” portfolio.
(For more strategic asset allocation examples see How Much Of My Money Should Be In Stocks Vs Bonds?)
Once your strategic asset allocation is determined, the portfolio is typically rebalanced on a pre-determined basis, annually for example, back to its original allocation.
Strategic asset allocation approaches recommend sticking with your original allocation over long periods of time rather than reacting to what is currently occurring in the markets.
The basis of strategic asset allocation lies in something called Modern Portfolio Theory. There are many today who question the validity of Modern Portfolio Theory and propose a tactical asset allocation approach instead.
Tactical asset allocation approaches allow for more flexibility, but also take more expertise, and, of course, there are no guarantees they will deliver better results.
