 Personal Finance, Asset Allocation Strategies, prepare to get financially fit by practicing personal finance. Most of this information comes from Investopedia, Six Asset Allocation Strategies that work, which you can find online. Take a look at the references, resources, continue your research from there. This by the Investopedia team updated December 4th, 2021. In prior presentations, we've been taking a look at investment goals, investment strategies, types of investments. Keep in that mind. We're now looking at six asset allocation strategies that work. Asset allocation is a very important part of creating and balancing your investment portfolio. After all, it is one of the main factors that leads to your overall returns, even more than choosing individual stocks. So clearly we wanna think about our time horizon, what we are saving for, what's the goal putting in the strategy which will include diversification asset allocation. Establish an appropriate asset mix of stocks, bonds, cash and real estate in your portfolio is a dynamic process. So clearly some of the allocation is within the types or classes of assets we are saving in stocks, bonds, cash, real estate are the common basic spread for the individual investor. Below, we've outlined several different strategies for establishing asset allocation with a look at their basic management approaches. Number one, strategic asset allocation. This method establishes and adheres to a base policy mix, a proportional combination of assets based on expected rates of return for each asset class. You also need to take your risk tolerance and investment timeframe into account. You can set your targets and then rebalance your portfolio every now and then. A strategic asset allocation strategy may be akin to a buy and hold strategy also heavily suggests diversification to cut back on risk and improve returns. So for example, if stocks have historically returned 10% per year and bonds have returned 5% per year, a mix of 50% stocks and 50% bonds would be expected to return 7.5% per year. So you can look at the historical returns and try to consider what the future returns will be as you do taking into consideration the overall risk and play, your risk tolerance and your time horizon. But before you start investing, you should first read if you can make money in the stocks. Number two, a constant weighting asset allocation. So strategic asset allocation generally implies a buy and hold strategy even as the shift in values of assets cause a drift from the initially established policy mix. So clearly one of the issues of course with investing is one, your time horizon is changing. So the mix of assets that you want might change over time and two, even if you weren't to do anything, the mix of your assets will change due to the fact that they're gonna have different returns and grow at different rates. So you can think about how you're gonna recalibrate from time to time. So for this reason, you may prefer to adopt a constant weighting approach to asset allocation. And again, these kind of depend on the kind of assets that you're putting into place. If you're just basically picking a target portfolio for a retirement fund, for example, then it's gonna be doing its asset reallocation within basically that mutual fund that's a targeted mutual fund. If you're doing your own asset allocations either possibly buying index funds, mutual funds or different mutual funds or stocks and bonds individually, then you gotta think about how you're gonna basically re-weight or what you're gonna do as time passes due to the fact that the allocations between the asset classes will naturally change and because your time horizon will be getting smaller as you go. So with this approach, you continually rebalance your portfolio. For example, if one asset declines in value, you would purchase more of that asset, right? And you might say, well, why would I purchase more of it if it went down because you're trying to get the same constant weighted of the assets. So if and if the asset value increased, you would sell it. There are no hard and fast rules for timing portfolio rebalancing under strategic or a constant weighted asset allocation. But 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. So then you're gonna say, well, how often do I do this rebalancing process? Well, you might set a timeframe that you could take a look at it. And of course, if something moves a little bit out of balance, then that's always gonna happen. But you might set a threshold and say, once I get this far out of where my time, my balance wants to be, that's when I take action and possibly rebalance at that point. So in other words, and also note, of course that the market could rebalance or further extend the problem within the balance given whatever the conditions of the markets are and the returns related to your assets. So three, tactical asset allocation. Over the long run, a strategic asset allocation strategy may seem relatively rigid. Therefore, you may find it necessary to occasionally engage in short-term tactical deviations from the mix to capitalize on unusual or exceptional investment opportunities. So this is where it gets a little risky because as somebody that is not a professional investor, we tend, I mean, if you are a professional, you wanna be an understanding of the market. The more we get in there and tinker with the portfolio instead of just following the guideline as a non-professional investor, the more likely we might do something out of a panic, right? Anytime you're doing something out of panic, you want to be careful. In other words, if the stock market is going down, our natural instinct is to take the money out of the stock market and put it somewhere else. And that often means that we might be doing that at the bottom of the market, which is precisely the wrong time to do that. So you wanna make sure that if you do the tinkering type of approach that you are well-informed and you're doing your tinkering not out of fear, but out of a well-thought-out plan. So this flexibility adds a market timing component to the portfolio allowing you to participate in economic conditions more favorable for one asset class for others. Tactical asset allocation can be described as a moderately active strategy since the overall strategic asset mix is returned to when desired short-term profits are achieved. So this strategy demands some discipline as you must first be able to recognize when short-term opportunities have run their course and then rebalance the portfolio to long-term asset position. So it takes a little bit more sophistication in your calculations if you're taking that approach. Number four, dynamic asset allocation. Another active asset allocation strategy is dynamic asset allocation. With this strategy, you constantly adjust the mix of assets and market rise and fall and as the economy strengthens and weakens. Again, this is becoming more of an active manager and you wanna make sure that you have a good understanding as to what are the underlying conditions and why you are doing that because more and more you might get to the point where you're trying to kind of beat the market instead of being the long-term player looking for the long-term gains. So just be careful with that. With this strategy, you sell assets that decline and purchase assets that increase. This makes dynamic asset allocation the polar opposite of constant waiting strategy. For example, if the stock market shows weakness, you sell stocks in anticipation of further decreases and if the market is strong, you purchase stocks in anticipation of continued market gains. So you're kind of playing the market a bit more. Be careful. Number five, insured asset allocation. With an insured asset allocation strategy, you establish a base portfolio value under which the portfolio should not be allowed to drop. So as long as the portfolio achieves a return above its base, you exercise active management relying on analytical research, forecasts, judgment and experience to decide which securities to buy, hold and sell with the aim of increasing the portfolio value as much as possible. If the portfolio should ever drop to the base value, you invest in risk-free assets such as treasuries, especially T-bills, so the base value becomes fixed. At this time, you would consult with your advisor to reallocate assets, perhaps even changing your investment strategy entirely. Ensure asset allocation may be suitable for risk-averse investors who desire a certain level of active portfolio management, but appropriate the security of establishing a guaranteed floor below which the portfolio is not allowed to decline. For example, so you might say, hey, I'm gonna give some flexibility to basically allow you to deduce, but if you go below this floor, I want my assets to be then allocated towards the more secure assets, so you got that stop, that safe stop part. For example, an investor who wishes to establish a minimum standard of living during retirement may find an insured asset allocation strategy ideally suited to his or her management goals. Number six, integrated asset allocation. With integrated asset allocation, you consider both your economic expectations and your risk in establishing asset mix. While all of the strategies mentioned above account for expectations of future market returns, not all of them account for investor's risk tolerance. That's where integrated asset allocation comes into play. This strategy includes aspects of all previous ones accounting not only for expectations, but also actual changes in capital markets and your risk tolerance. Integrated asset allocation is a broader asset allocation strategy, but it cannot include both dynamic and constant weighting allocations since an investor would not wish to implement two strategies that compete with one another. So what's the bottom line in all this stuff? That's what I wanna know. Asset allocation can be active to varying degrees or strictly passive in nature. Whether an investor chooses a precise asset allocation strategy or a combination of different strategies depends on that investor's goals, age, market expectations, and risk tolerance. Keep in mind, however, these are only general guidelines on how investors may use asset allocation as a part of their core strategies. Be aware that allocation approaches that involve reacting to market movements require a great deal of expertise and talent in using particular tools for timing these movements. So again, whenever, if you're not a professional investor, you wanna make sure that you're not just reacting because if you're just reacting to the market, then you're probably reacting just at the wrong time because that's when everyone else gets scared, right? So that's what's gonna end up happening. The emotions start to drive the market and you might find yourself buying when everything is high and selling when everything is low. And that's precisely the opposite of what you wanna do. You wanna follow the old adage, I buy low sell high, that's my motto. That's how I do my investing. So perfectly timing the market is next to impossible. So make sure your strategy isn't too vulnerable to unforeseeable errors. So clearly again, nobody knows the future. There's no crystal ball reader out there. Although there's a lot of people that say that act like they are, you know, just be aware that, you know, no one really knows what's gonna happen and plan your strategy accordingly. Investopedia does not provide tax, investment or financial services and advice. So this isn't of course personalized advice is general information. The information is presented without consideration of the investment objective risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future performance. So again, no one has a crystal ball. Things could change in the future. All we can do is look at the past as a type of indicator to help us as one condition or one item that's gonna help us to kind of project out into the future. Investing involves risk, including the possible loss of principal.