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What is 'Asset Allocation'
Definition: Asset allocation is an investment strategy by which an investor or a portfolio manager attempts to balance risk versus reward by adjusting the percentage of amount invested in an asset of a portfolio according to the risk tolerance of the investor, his/her goals and the investment time frame.
Description: Financial assets vary in returns from each other depending on market conditions and user requirements. Almost all asset classes are not perfectly correlated with each other, so diversifying across multiple sectors tends to bring down the overall risk of a portfolio.
Strategic Asset Allocation
This involves allocating fixed weights to various asset classes over the entire investment horizon. The return of the portfolio is then simply the weighted average return of various asset classes. For example, if you invest 60 per cent of your investments in stocks which have 15 per cent returns and 40 per cent in bonds which offer 5 per cent returns, then the mean return of the portfolio is 11 per cent.
Tactical Asset Allocation
This strategy allows short term deviations from the ideal asset allocation to capitalize on market fluctuations or attractive investment opportunities that exist for a small period of time. The investor tends to remain moderately active and once the short term profits have been achieved the portfolio is rebalanced to the original mix.
Dynamic Asset Allocation
This strategy is meant for active investors who monitor their portfolio on a regular basis. The investor tends to modify the allocation percentage of various assets depending upon the how the markets and the economy is fluctuating. User may shift the gains from a volatile asset to less risky assets when markets are correcting or may shift to riskier assets when the markets are booming.
Description: Financial assets vary in returns from each other depending on market conditions and user requirements. Almost all asset classes are not perfectly correlated with each other, so diversifying across multiple sectors tends to bring down the overall risk of a portfolio.
Strategic Asset Allocation
This involves allocating fixed weights to various asset classes over the entire investment horizon. The return of the portfolio is then simply the weighted average return of various asset classes. For example, if you invest 60 per cent of your investments in stocks which have 15 per cent returns and 40 per cent in bonds which offer 5 per cent returns, then the mean return of the portfolio is 11 per cent.
Tactical Asset Allocation
This strategy allows short term deviations from the ideal asset allocation to capitalize on market fluctuations or attractive investment opportunities that exist for a small period of time. The investor tends to remain moderately active and once the short term profits have been achieved the portfolio is rebalanced to the original mix.
Dynamic Asset Allocation
This strategy is meant for active investors who monitor their portfolio on a regular basis. The investor tends to modify the allocation percentage of various assets depending upon the how the markets and the economy is fluctuating. User may shift the gains from a volatile asset to less risky assets when markets are correcting or may shift to riskier assets when the markets are booming.
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