Asset Allocation Strategy

Asset Allocation Strategy and Asset Allocation Rebalancing

What is Asset Allocation Strategy?


An asset allocation strategy provides diversification among different investment categories, such as equity, debt, cash, international investments and real assets, such as gold and real estate.

By allocating a fixed percentage of the total portfolio to each category and then maintaining those percentages with subsequent investments through asset allocation rebalancing, the investor realizes an averaging effect.

This benefit occurs because with each asset allocation rebalancing, the investor invests more in the categories that have relatively under performed in the preceding period. Often these categories gain strength in the later stages of the market cycle.

An Asset Allocation Plan Example


The illustration below shows how a $100,000 asset allocation plan could work. Assume an investor had made the following investments and was considering asset allocation rebalancing based on the increased current portfolio value:


Asset Allocation Table


Forty percent of the current value, $113,000, is now about $45,200 and 20% of that is about $22,600.

Asset Allocation Rebalancing


Following our proposed model, when we perform asset allocation rebalancing, we reallocate the money among the funds to achieve the original percentages — meaning we need to take $2,800 out of the stock fund. Of this, $1,200 would be placed into the bond fund and $1,600 into the gold fund to achieve the original balance.

Benefits of an asset allocation rebalancing strategy

Important benefits can be realized by following this asset allocation rebalancing strategy including: disciplined investing, averaging down by investing more in the categories which have appreciated less, and maintenance of the asset mix determined to be appropriate for the investor’s individual objectives and prudent diversification.

Additional Asset Allocation


The same principles apply when new money is invested into the account. Assume the same $113,000 account value. Our investor now has a $10,000 quarterly deposit ready to be allocated to the program ($10,000 + $113,000 = $123,000). Forty percent is $49,200 and 20% is $24,600.

Following the asset allocation plan model, we would then allocate $1,200 to the stock fund, $5,200 to the bond fund, and $3,600 to the gold stock fund, thereby returning the portfolio back to the original desired allocation percentages.

Asset Allocation

Learn more about Asset Allocation and the Efficient Frontier

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