Strategic Asset Allocation
Under a strategic asset allocation model, a portfolio manager and customer work together to design an ideal mix (on a percentage basis) of major asset classes and subclasses. The model seeks to find the optimal level of portfolio performance given a customer’s investment goals (growth, income, capital preservation, and tax benefits).
When using strategic asset allocation, a key question is what method to use to divide the assets in a portfolio. Two primary methodologies are allocating by style and allocating by asset class.
An allocation by style divides the assets into investment goals such growth and value. An allocation by asset class divides into general asset categories, such as stocks, bonds, and cash, and then further subdivides these categories (common stock, preferred stocks, international stocks, corporate bonds, government bonds, etc.)
Portfolios are often strategically allocated into smaller subcategories that are a mix of both style and asset class, such as value stocks, growth stocks, investment grade corporate bonds, corporate junk bonds, and so forth.
Here’s a simple example of strategic asset allocation: a customer decides that she wants to invest a $100,000 portfolio into:
- • 60% stocks (40% domestic common, 10% international common, 10% preferred)