The way investors allocate his or her assets inside his or her retirement portfolio is one of the most important financial decisions. That includes the investment classes and the percentage of each class. The most effective way to best allocate your asset is by applying a strategic asset allocation and a static allocation approach.
With strategic asset allocation, you can stay away from emotional-based short term trading decisions from the current market events.
Defining Strategic Asset Allocation
It is a type of traditional approach inside modern portfolio theory. With this approach, you no longer bet on financial trends, but you established fixed allocation to get the advantages of the market.
This approach makes you have to determine the amount of money you must invest in broad categories of your investment. Besides, you also have to decide your investment subcategories, like a small-cap or mid-cap stocks. Then, you have to stick with that allocation for years.
When Can You Apply Strategic Asset Allocation
It allows you to manage your assets passively. This approach will be appropriate to be implemented in these following situations:
If an investor wants to buy and hold
If someone wants to purchase assets to keep them in the long term. This way that investor does not have to move the money many times or pay the transaction fees.
If an investor has a long term horizon
Strategic asset allocation will perform better if the investor stores his or her money inside the investment portfolio. That happens due to this approach provides more time for the market to recover from any downturns. Thus, this approach is suitable for a retirement investment.
If an investor prefers a hands-off approach
Strategic asset allocation, an investor can only purchase the asset and rebalance them (to sell or buy another asset) when there is a diverge from your initial mix.
Thus, this approach is best for those who do not want to spend many times to think and manage their investment.
If an investor has a limited investing experience
With this approach, investors will have to spend many times to research before he or she purchases the assets. Yet, after the purchase is made the investor does not need to dive deep into the market trends. Thus, it does not require so much trading experience.