Strategic Asset Allocation
By Ricardo Ribeiro – Updated December 6, 2019
This article will explain what it is and how to use it.
What Is Strategic Asset Allocation
The strategic asset allocation usually is passive. In other words, you select your asset classes, decide how much you want to allocate to each asset class, and keep that allocation “fixed” over time.
If you are risk-averse, you should have o higher proportion of safer assets than riskier assets — for example, 80% safer assets and 20% riskier assets. Of course, you have to decide the exact percentages based on your objectives and constraints.
Note that a passive strategy is not 100% passive. If you build your portfolio and let it be, the allocations will deviate from your target over time.
A simple example:
Let’s imagine a target allocation of 80% bonds and 20% stocks.
On moment 1, that is precisely the portfolio allocation. However, as time passes, bonds and stock prices will fluctuate, and the portfolio will deviate from the 80-20 target.
Let’s say that, sometime later, bonds are 78%, and stocks are 22% of the portfolio.
The way to fix that is to rebalance the portfolio. In other words, one needs to sell 2% worth of stocks and buy bonds with the proceeds to bring it back to the 80-20 target.
Portfolio rebalancing is essential, but it can be expensive if you do it too often. I would say rebalancing once per semester or even once a year should be enough.
If your portfolio is volatile, then rebalancing every quarter might perform better. However, I would not rebalance more frequently than once every quarter.