Asset allocation means investing in more than one asset class. In addition, asset allocation must be done in order to reduce the risk in your investments. Moreover, there are 6 asset allocation strategies explained in this article.

In addition, for asset allocation, you can consider assets like real estate, equity, gold, bonds, etc. based on your risk profile and financial situation.

However, you should remember that asset allocation will decrease the risk of investing in one asset class.

And it may or may not increase the overall returns.

6 Allocation Strategies.

1. Strategic Asset Allocation…

This strategy involves a base policy mix based on return expectations of asset classes you chose.

In addition, you need to consider your risk tolerance and time frame into account.

Moreover, you need to rebalance the portfolio every now and then.

And this strategy may akin to the buy-and-hold strategy.

In addition, this strategy suggests diversifying heavily in order to improve the returns.

For example, an equity mutual fund historically gave 10% p.a. roi, and a debt fund gave 5% roi in the same period.

Then 50% equity fund, 50% debt fund is expected to give roi of 7.5% in a year.

2. Constant Weight: Asset Allocation…

Strategic asset allocation is generally a buy and hold strategy.

In addition, you may not do a rebalancing even if there is a drift in asset values.

So, you can choose a constant-weight asset allocation strategy for your investments.

And in this strategy, you will continuously rebalance the portfolio.

If one asset class declines, you will buy more of that asset.

And if the asset value increases, you will sell that asset to rebalance.

Finally, there is no correct time period to rebalance the portfolio in strategic and constant weight asset allocation strategies.

But you can rebalance if any one asset class decreases or increases at least by 5% from its original assumed weight.

3. Tactical Asset Allocation…

Over the long run, strategic asset allocation may be rigid.

Therefore, you need to deviate from the actual assumed weight.

In order to time the markets.

For example, your original strategy is to have 50% equity and 50% debt.

But if you believe that equity markets will fall in big, you can decrease equity weight to 30% and wait for the correction.

And you can invest up to 70% in equity after the fall, and you can invest in the original weight mix once the short-term gain is captured.

Moreover, changing the weights based on economic expectations is called tactical asset allocation.

So, this strategy can be called a moderate active trading strategy, as we are investing back in the original weight once the short-term gains are captured.

Finally, this strategy must have discipline.

And you should first be able to find the short-term opportunities and should be able to rebalance the portfolio back to its original weights.

However, you must be aware of your financial goals while applying this tactical asset allocation strategy.

Accordingly, only you should have weights in this strategy.

4. Dynamic Asset Allocation…

This strategy is also an active asset allocation strategy.

In addition, in this strategy, you will constantly change the weights based on market rises and falls.

If the economy weakens, you will sell equity, and if the economy becomes strong, you buy more equity.

So, the dynamic asset allocation is polar opposite to constant weight asset allocation.

For example, if the market weakens, you will sell the stocks, expecting the market to fall further.

And if the market gets strong, you will buy more stocks, expecting the market to rise further.

5. Insured Asset Allocation…

In this strategy, you will fix a base portfolio value.

And the portfolio should never go down this base value.

As long as the portfolio achieves returns over and above the base value, you exercise active management, relying on analytical research.

And you will try to increase the portfolio value as much as possible.

In case your portfolio values come to near the base portfolio value.

Here, you will invest completely in 100% risk-free assets like government bonds.

Finally, you may consult your financial advisor to revisit the asset allocation and even the complete investment strategy.

Again, this strategy may be suitable for risk-averse investors who would like to have a base portfolio value to feel safe.

Moreover, this strategy may be suitable for retired persons who wish to have a minimum standard of living in their retirement life.

And after their standard of living is safe, for balance funds, they can take the risk.

6. Integrated Asset Allocation…

In this strategy, you will consider both economic expectations and your risk tolerance in deciding asset mix.

In addition, all the above strategies account for ecological expectations, but not all of them account for your risk tolerance.

Hence, an integrated asset allocation strategy comes into play here.

Finally, this strategy includes aspects of previous strategies and also includes the actual changes in the market and risk tolerance of investors.

Again, this strategy is a broder asset allocation strategy.

But it will not include both constant weight strategy and dynamic strategy.

As both will compete with each other, we cannot include both in one strategy.

What is the best asset allocation with age out of these 6 asset allocation strategies?…

Asset allocation suitability will vary from individual to individual.

Generally, young investors can take higher risk as their financial goals are far away, like retirement.

So, you can invest more in equity for your longer-term goals, like retirement, and decrease the equity exposure when the retirement goal is approaching.

In addition, you can follow 100-minus-age formulas to invest in equity and debt.

If your age is 30, you can invest 100 minus 30 = 70 in equity.

In addition, if your age is 58 and you are nearing retirement, then 100 minus 58 = 42 is equity exposure.

Where should you invest your money in your retirement? …

In your retirement life, you have to consider capital safety first.

So, consider money market funds, bank FDs, annuity plans from life insurance, and savings accounts for emergency purposes.

Finally, you can take risks in retirement life also.

But you should be aware of the risks involved.

You will not have a second chance in retirement life if you lose your capital.

So, hiring a good Sebi Registered Investment Advisor will be a good idea.

How should you plan your investment allocation? …

Asset allocation must be decided considering your risk tolerance, financial situation age, etc.

Finally, you can use any of these 6 asset allocation strategies for your future financial needs in order to achieve your financial goals.

Once the above access is done, you have to invest in a mix of equity, bonds, gold, real estate, etc. for creating wealth for your financial goals.

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