Monday, May 23rd, 2022

5 Successful Asset Allocation Strategies That Work

Asset allocation is an important part of creating and balancing the investment portfolio. It leads to unexpected returns. Establishing a profitable mix of stocks, bonds, equities, cash, gold, and real estate in your portfolio is a gradual process.

Your portfolio displays your unsecured business loans no personal guarantee UK and goals at any point in time.

Let’s first understand asset allocation.

What is Asset Allocation?

Asset allocation signifies the distribution of assets across multiple asset categories. The main asset allocation classes are- stock mix, bonds, and cash market securities.

These classes have sub-classes as well:

  1. Large capital stocks: Shares issued by companies having a market capitalization exceeding $10 billion.
  2. Mid-capital stocks: Shares issued by companies having a marketing capital range of $2-$10 billion
  3. Small-cap stocks: Shares issued by companies having a market capitalization below $2 billion.
  4. Fixed-income securities: Highly rated corporate government bonds that pay a set amount of interest at maturity. These securities are less risky than stocks.
  5. REITs: Shares in an investor pool or mortgages, apartments.

Best Asset Allocation Strategies to Follow for Maximum Gains

1) Strategic asset allocation

It adheres to the base policy mix and is a combination of assets based on expected rates of return for each class. Undertake risk tolerance and investment timeframe into account while setting targets. It is like the buy-and-hold strategy. It helps in maximizing returns and cutting on risks. In this, the portfolio is re-balanced when the original allocation deviates from the initial stage because of variation in returns.

For example, if the stock market rises by 25% with 6% returns- the asset allocation will be 73% equity with 27% debt. It is then that the fund manager will sell stocks and purchase bonds to equalize asset allocation to 70% equity and 30% debt.

Stick to your strategy irrespective of market fluctuations.

2)  Dynamic asset allocation

One continuously adjusts the assets allocation mix according to the market situation in dynamic asset allocation. Counter-cycling strategy is famously used for dynamic asset allocation. In this, the funds increase their equity allocation when equity variations decline and reduce debt allocation.

 It walks on the principle of buying low and selling high. Different fund managers use different valuation criteria for dynamic asset allocation. A few cyclic dynamic funds allocation follows a counter-cyclical asset allocation strategy. And main follows a tactical approach.

For example, an investment manager using dynamic asset management may choose to reduce the portfolio’s holdings and increase fixed assets that reduce risks. If the portfolio runs full of good equities, the manager may sell some of his good equities and purchase bonds.

3) Tactical Asset allocation

Compared to tactical asset allocation, strategic asset allocation strategy is rigid. Tactical asset allocation calls for timing the stock market and thus requires the needed expertise. The practice of timing the market is not considered an excellent investment or trading strategy, but investors do so in order to earn good profits. And it is riskier.

In this, the investor can deviate a bit from a long-term asset allocation strategy and benefit from the market gain. Thus, in a tactical allocation strategy, it is important to know the right time to make use of it and earn a whopping profit.

Momentum-based strategy is one of the widely adopted tactical asset allocation strategies. It helps stock prices to rise suddenly and thus boosts short-term returns on investment. In this, the investor needs to identify the right momentum stocks, which can assure him of the short-term gains he is eyeing, and assign higher weights to them.

4) Age-based asset allocation

In this, the investment decision is based on the age of the investors. Thus, investors should make stock investment decisions based on deducting their value/ age from the base of 100. The figure depends purely on the life expectancy of the investor. Thus, the higher is the life expectancy, the higher is the investment portion committed to the risky stock market or equity investment arenas.

For example, Mr. Jones, aged 40, is looking forward to retiring at 60. According to the age-based asset allocation approach, he will invest in the proportion of 60% and the rest in other assets. It is because when you subtract 40 from 100, you get 60.

5)  Insured asset allocation

It is the best strategy for investors averse to risks. It involves setting a base value that a portfolio has to maintain. If it drops beyond that value, the investor will decide on the action to avert the risk. At other times, when the value is higher than the base, the investor can comfortably buy, hold, take debt consolidation loans UK or sell the assets.

The future is uncertain, and it may throw surprises that fall in its way. Thus, it is better to remain guarded for asset allocations. These strategies will surely help pull the gear in the right direction of asset allocation.

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