What is Strategic Asset Allocation?
Strategic asset allocation is the practice of realigning a portfolio's asset composition in order to accommodate changes in market climate.
How Does Strategic Asset Allocation Work?
Portfolios are made up of different asset classes, with each asset class comprising a certain percentage of the total portfolio (i.e. asset allocation). Asset classes react differently to changes in the economic and market outlook. Strategic asset allocation involves changing these percentage allocations in response to expected shifts in the market. For example, if analysts foresee an imminent upswing in the equity markets, an investor may want to increase the percentage of her portfolio allocated to stocks.
Why Does Strategic Asset Allocation Matter?
By employing strategic asset allocation, investors and investment managers are able to make adjustments intended to reduce the risk of loss and/or increase potential for reward in advance of a forecasted shift in market trends.