A Lowdown on Strategic Asset Allocation

Asset allocation plays a critical role in successful investing, and deciding how to best divide your assets is one of the most important financial and investment decisions you can make.

The following question and answers address some of the main points to know about strategic asset allocation and how it can help your portfolio.

What Is Strategic Asset Allocation?

Strategic asset allocation involves dividing your investment portfolio’s assets among different asset classes, such as stocks, bonds, and cash. It’s usually done on a percentage basis, and there’s no one right answer for everyone when it comes to allocation approaches. The right decisions are based on an investor’s individual situation, needs, and level of risk that they’re comfortable with, and this can change over time.

What Are Some of the Different Asset Classes to Include in Your Portfolio?

Investment opportunities within the same asset classes have similar characteristics and also are subject to the same laws and regulations. 

The following are some examples of different asset classes:

• Equities – shares of ownership in a company (stocks)
• Fixed-income securities – loans that are sold to investors in the form of units (bonds)
• Cash and cash equivalents – includes cash, money market funds, and certificates of deposit (CDs)
• Alternative investments – includes anything that’s not one of the categories above, such as real estate and precious metals

How Should You Allocate Your Assets? 

The following factors affect the way you’ll want to allocate your assets:

• Risk tolerance – If you are an aggressive investor, you have a high risk tolerance and are willing to risk losing some or all of your original investment for a chance of higher returns.
• Investment goals – You should determine your investment goals before actually investing. These can include paying for a larger home, helping put your child through college, and funding your retirement.
• Time horizon – Each of your goals has a time schedule, some more flexible than others. The more time you have to reach a goal — such as being decades away from retirement — the more aggressive you can afford to be with your investments. For more short-term goals, such as a retirement that’s only a few years away, your asset allocation should be more conservative.
• Inflation – Certain asset types are better than others at keeping up with the rate of inflation. CDs and bonds, for example, generally don’t perform as well as stocks do.

What’s the Difference Between Strategic Asset Allocation and Tactical Asset Allocation?

Strategic asset allocation is similar to a buy-and-hold investment strategy. It establishes an asset mix that’s proportionally divided based on expected return rates. It’s often considered to be an approach for the long term (over 10 years) and needs to be monitored and rebalanced so it stays in line with your goals.

Tactical asset allocation takes a shorter-term view. Instead of taking the set approach you’ll see with strategic asset allocation, it’s more flexible. Your investments are handled with active portfolio management to limit losses and maximize profits.

Why Are Stocks Best for Long-Term Investors?

The stock market has created enormous amounts of wealth over the years for investors who have been willing to ride out the highs and lows of market fluctuations. The S&P 500, for example, returns an average of 8 to 12% a year. (But this doesn’t happen every year. In fact, the S&P actually falls 3 out of every 10 years, on average.) 

While, in the short term, the stock market can be more volatile than many other types of investments, over the long-term, stocks almost always outperform virtually every other type of investment. They also allow investors to diversify their investments over different companies and sectors, and the return on stocks will typically outpace the rate of inflation. If stocks are a part of your strategic asset allocation, they should be a part of a long-term strategy.

Strategic asset allocation is an important part of a successful investment plan, and it should be adjusted periodically as needed. If you would like help rebalancing your portfolio, planning a comfortable retirement or achieving your other financial goals, schedule a virtual meeting and join our Retirement Income Academy Course. You can also download a free copy of our eBook, “How to Retire with Confidence and Clarity” for even more helpful information!