Strategic Asset Allocation: How Does It Work?

Strategic asset allocation is an investment strategy that many people use to govern the decisions that pertain to their portfolios. Here are the basics of strategic asset allocation and how it works.

Strategic Asset Allocation

With this type of portfolio management strategy, you predetermine a percentage of each asset in your portfolio. For example, you might decide that you are going to have 60 percent in equities, 30 percent in bonds, and 10 percent in the money market. These percentages will govern your investment decisions at all times. Throughout the life of your portfolio, you will strive to stick to these designated percentages regardless of what happens.

Re-balancing

With this strategy, you will have to continually re-balance your portfolio. Because of the changes in the market, the value of your securities is going to change constantly. When this happens, you will have to sell securities and buy different ones in order to maintain the ratios that you have put in place.

For example, let's say that the values of the stocks in your portfolio increase significantly. When this happens, it might increase the percentage of assets that are made up of equities to 65 percent of the portfolio. You would then have to sell some shares of stock and use the money to purchase bonds or invest in the money market.

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