Portfolio Management

Portfolio Asset Allocation Strategies

Portfolio Asset Allocation Strategies
Asset allocation refers to the balance between growth- and income-oriented investments in a portfolio. This allows the investor to take advantage of the risk/reward trade off and benefit from both growth and income. Building an appropriate asset mix plays a determinant role in a portfolio's overall risk and return. A portfolio's asset mix should reflect goals at any point in time.

Basic steps to asset allocation consist of:

  • Choosing which asset classes to include (stocks, bonds, money market, real estate, precious metals, etc.)
  • Selecting the ideal percentage (the target) to allocate to each asset class
  • Identifying an acceptable range within that target
  • Diversifying within each asset class

Asset allocation can be an active process to varying degrees or passive in nature. Asset allocation strategies outlined in this article should be used only as general guidelines on how investors may use asset allocation as a part of their core strategies.

Constant-Weighting Asset Allocation

Strategic asset allocation generally implies a buy-and-hold strategy, even as the shift in values of assets causes a drift from the initially established policy mix. With this approach, you continually rebalance your portfolio. For example, if one asset is declining in value, you would purchase more of that asset; and if that asset value is increasing, you would sell it.

There are no hard-and-fast rules for timing portfolio rebalancing under strategic or constant-weighting asset allocation. However, a common rule of thumb is that the portfolio should be rebalanced to its original mix when any given asset class moves more than 5% from its original value.

Strategic Asset Allocation

This method establishes and adheres to base policy mix, which is a proportional combination of assets (target allocations) based on expected rates of return for each asset class. The portfolio is periodically rebalanced back to those targets as investment returns skew the original asset allocation percentages. For example, if stocks have historically returned 8% per year and bonds have returned 4% per year, a mix of 50% stocks and 50% bonds would be expected to return 6% per year.

The concept is similar to a buy-and-hold strategy, rather than an active trading approach. The strategic asset allocation targets may change over time as the client's goals and needs change and as the time horizon for major events, such as retirement and college funding, grows shorter. Read more "Portfolio Asset Allocation Strategies"

Constructing Portfolio Using ETFs

Portfolio Construction Using ETF
Having the right mix of stocks, bonds, cash, and commodities in your portfolio, and being well diversified within each asset class, can have a profound impact of your returns. ETFs can be an easy way to gain this diversification. They can be cheap, flexible, and tax-efficient and may help you gain access to sectors and asset classes that would otherwise be closed off to individual investors.

The first step in building an ETF portfolio is to figure out the right asset allocation. You will consider your theoretical exposure to cash, bonds, large-cap stocks, medium/small-cap stocks, and foreign stocks. In general, investors with a long time horizon should consider a more aggressive approach weighted heavily toward equities, while people within a few years of needing their money should stick to more conservative investments.

After making your decisions and with help of asset allocator tools provided by many financial website, you can know the chance that you will be able to meet your financial goals given how much money you already have invested and how much additional money you intend to invest monthly. Read more "Constructing Portfolio Using ETFs"

Investment Options to Construct Asset Allocation Portfolio

To capture the benefits of diversification and asset allocation, you will want to build a portfolio of several asset classes that are somewhat uncorrelated. You have a few options for building such a portfolio.

  • Portfolio of individual stocks and bonds
  • Portfolio of actively traded mutual funds
  • Portfolio of index funds and ETFs

Read more "Investment Options to Construct Asset Allocation Portfolio"

Asset Allocation

Asset Allocation
Asset allocation is an investment portfolio technique that aims to balance risk and reward by distributing a portfolio's assets among major categories of asset classes according to an individual's goals, risk tolerance and investment horizon. 

Each asset class has different levels of risk and return, so each will behave differently over time. While one asset is increasing in value, another may be decreasing or not increasing as much. 

Most financial professionals agree that asset allocation is one of the most important decisions in constructing investment portfolio. It is the principal determinants of your investment results. In other words, selection of individual securities is secondary to the allocation of investment portfolio among asset classes. Read more "Asset Allocation"