What is it?
Asset Allocation is the implementation of an investment strategy or a financial plan in a way that balances risk versus reward.
It is done by adjusting the percentage of each asset in an investment portfolio according to investor's risk tolerance, goals and investment time frame.
The focus is always on the overall portfolio. Such a strategy contrasts with an approach that focuses on individual assets.
The three main asset classes in investing equities, fixed income and cash an equivalents have different levels of risk and return.
So they will behave differently over time. This calls for rebalancing.
Benefits of Asset Allocation
- Better alignment to your Financial Plan
- Management of your wealth becomes more comprehensive.
- Takes into account your risk profile, goals and investment objectives.
Type of Asset Allocation Strategies
- Strategic Asset Allocation
- Dynamic Asset Allocation
- Tactical Asset Allocation
- Core and Satellite Asset Allocation
Typical Asset Allocation in a portfolio
(source : wikipedia)
Rebalancing
Rebalancing is the process of realising the weights of a portfolio. Rebalancing involves periodically buying or selling assets in a portfolio to maintain an original or desired level of asset allocation risk.
Primarily, portfolio rebalancing safeguards the investors from being overly exposed to undesirable risks.
Rebalancing ensures that the portfolio exposures remain within the manager's area of expertise.
The various types of rebalancing are
- Calendar rebalancing
- Constant Mix strategy or within a tolerance range
- Constant proportion portfolio insurance or CPPI - a more complex approach.
Calendar Rebalancing over a period of time (an example)
