Asset allocation is the process of deciding where to put money so it will grow the most. Most asset allocation strategies involve theories taken from two main methods of determining asset allocation: strategic asset allocation and tactical asset allocation. When using asset allocation strategies, an investor divides assets among investment methods like real estate investments, stocks, and savings accounts. When an investor is diversifying investments, he or she is performing a type of asset allocation.
Strategic asset allocation involves keeping investments for the long-term and adjusting the contents of an investment portfolio as needed on a regular but infrequent basis. This method of asset allocation involves choosing low-risk investments and adjusting the portfolio by buying and selling to adjust to meet the growth goals set for the portfolio. Strategic asset allocation strategies require little interaction with the contents of the portfolio.
Investors who hold stock in favorite companies for long-term gains are employing a strategic allocation strategy. An investor using purely strategic methods will make calculated investments in known reliable investments and make changes on designated dates only when necessary to meet long-term investment goals. This method is generally more stable than other asset allocation methods, but often does not offer the larger gains in profit offered by short-term investment methods.
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Tactical strategies offer a higher-octane asset allocation strategy for investors who want to be involved in the active market. In contrast with strategic asset allocation strategies, tactical asset allocation strategies adopt an active stance on the value of the portfolio. An investor using tactical asset allocation strategies keeps an eye on market conditions to benefit from short-term changes in the market. Consequently, an investor using purely tactical methods will not keep investments on a long-term basis and will buy and sell investments to turn a profit from the way the market moves. This method can provide faster profits, but it also carries greater risk for loss in the event of an unexpected value crash.
Most active investors use a combination of the two methods of asset allocation to build a productive investment portfolio. Keeping a consistent portfolio of reliably growing investments combined with changing investments designed to make a quick profit on market conditions can have many benefits for an investor. Using a combination of both methods can provide the benefits and stability of long-term market growth while allowing the investor to make money on short-term trades in markets in which the investor is most familiar.