Asset allocation is simply creating a portfolio with holdings among a number of different assets such as stocks, bonds, real estate, or cash. The goal of asset allocation is to create a portfolio in a way that meets your particular needs, minimize risk, and meets investment objectives.
The three major asset allocation strategies are:
- Strategic asset allocation. A passive buy-and-hold strategy where asset weights are set for a long period of time and only rebalanced when necessary.
- Tactical asset allocation. An active, market-timing strategy that responds to changing markets by trying to take advantage of new trends.
- Core-satellite asset allocation. This strategy divides a portfolio into a core set of holdings of a few index funds or total market holdings with a few small satellite holdings that provide additional return or diversification for the portfolio.
I don’t want to sway any votes, but I did want to comment briefly on my own strategy. I primarily use the core-satellite strategy, with just a touch of tactical. By that I mean that a large portion of my investments are in core holdings that won’t change–a few index funds that cover the capital markets, a bond fund or two, etc. These are simply a buy-and-hold. But my satellite funds are smaller holdings that provide diversification, but they aren’t all necessarily expected to be held for 20 years. I use some small satellite holdings to work as some tactical moves to help try and capitalize on current trends.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.