A properly diversified portfolio that yields great return on investment is all about finding the best balance. This is where asset allocation comes in. It’s a dynamic way of keeping all of your investments in check and determining how much capital you’re willing to risk in each market you choose. The uncertainty of the economy plays a big factor in how you want to approach your asset allocation. Here are some strategies that could work for you.
Strategic Allocation
It’s safe to assume to most investment portfolios implement a buy-and-hold approach. This does work, but you need to be flexible when one asset does not do as well as the other. This is called Strategic Allocation. For example, a lot of portfolios include three assets: stocks, bonds, or ETFs, and the percentage of the portfolio that goes into each asset depends on their probability for profits. Say you have a portfolio of 40% domestic stocks, 30% foreign profits, and 30% bonds. Domestic stocks take up most of the portfolio because the U.S. stock market experiences a lot of volatility.
In a strategic approach, whenever one asset depreciates in value, the percentages change. Then, you can sell an asset within the higher percentage and buy in the dip in an underperforming asset. That way, you can keep things balanced and recover over a longer period of time. It’s a more conservative approach that limits the risk to your portfolio.
Tactical Allocation
Speaking of risk, Tactical Allocation requires you to constantly keep an eye on your assets to ensure the risk does not outweigh the reward. This can help combat unfavorable volatility, but it does have its drawbacks. Most of the errors are made through the portfolio holder. If the investor gets market prediction wrong, or purchases an overvalued stock, their returns could diminish.
For a tactical allocation strategy, it’s best to put your focus on undervalued stock and try to stay away from anything overvalued if you can. Plus, anything that’s a cheaper purchase is better than more expensive since it can reduce your risk to reward ratio, even if the cheaper ones don’t experience high returns. It’s mostly based on momentum rather than their trade volume.
A greatly diversified portfolio is all about finding the right balance, and staying up to date on the assets within to ensure you’re meeting your investment goals.