The goal of building a strategic portfolio is to earn the optimal level of return at the targeted risk level. Choosing the appropriate degree of asset allocation and the right mix of assets isn’t always easy, though.
In this post, we’ll quickly go over some of the ways investors choose to manage asset weightings within their portfolios. We hope you find this content insightful!
This strategy is based on the allowable percentage composition of an asset in a portfolio. With this approach, investors generally buy and hold, but periodically rebalance their portfolios (read more about portfolio rebalancing here).
In the case of Constant-Weighting Asset Allocation, investors use target weights and tolerance ranges to guide asset allocation and rebalance their portfolios accordingly. Target weights can be established based on many factors, such as risk parity, for example.
Risk Parity is a portfolio management strategy that seeks to weight assets within a portfolio according to their risk-reward profiles. Typically more conservativeassets have larger positions within the portfolio, whereas riskier investments tend to occupy a lesser portion of the overall portfolio.
Dynamic Asset Allocation is an active investment strategy that requires investors to constantly adjust the assets and weightings within their portfolio according to market conditions. This strategy is akin to trading, since the focus of the portfolio is on what works well now as opposed to what will work well in the long-term. With this strategy, you sell when assets decline in price and buy when assets gain momentum.
As Investopedia puts it, in Dynamic Asset Allocation “(...) You sell stocks in anticipation of further decreases and if the market is strong, you purchase stocks in anticipation of continued market gains”.
Insured Asset Allocation is somewhat of a hybrid approach involving aspects of both Constant-Weighting and Dynamic Asset Allocation. With this approach, you establish a base portfolio value that should be maintained. If the portfolio achieves a return above the determined base-value, you engage in active trading to capitalize on particular investment opportunities. If the overall portfolio value decreases below the base-value, however, you increase your exposure to more conservative investments such as fixed income in order to contain losses.
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Diversification and asset allocation do not ensure a profit or guarantee against loss.
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