Asset allocation models are frameworks for dividing an investment portfolio among different asset classes such as stocks, bonds, and cash. The goal of asset allocation is to balance risk and reward by selecting a mix of assets that align with an individual's investment goals and risk tolerance.
There are several different types of asset allocation models, including:
Strategic asset allocation: This model involves setting a long-term asset allocation mix based on an individual's investment goals and risk tolerance and adjusting the mix only periodically. This type of model emphasizes stability and consistency over short-term performance.
Tactical asset allocation: This model involves making more frequent adjustments to the asset allocation mix based on market conditions and other factors. The goal of this type of model is to take advantage of market opportunities and improve short-term performance.
Dynamic asset allocation: This model involves regularly adjusting the asset allocation mix based on a combination of strategic and tactical considerations. This type of model balances the stability and consistency of strategic asset allocation with the opportunity for short-term performance offered by tactical asset allocation.
Life cycle asset allocation: This model involves adjusting the asset allocation mix based on an individual's age and expected retirement date. As an individual gets closer to retirement, the model typically shifts from a higher allocation to equities to a lower allocation to bonds and cash.
Each asset allocation model has its own set of strengths and weaknesses, and the right model for a particular individual will depend on their investment goals, risk tolerance, and time horizon. It's important to seek professional advice before making any investment decisions and to review your investment portfolio regularly to ensure it remains aligned with your investment goals and risk tolerance.
