Asset allocation strategies for beginners

Below are some approaches to setting up your investment mix, along with tips for managing each strategy:

1. Strategic Asset Allocation:

Strategic asset allocation resembles setting a roadmap and maintaining it. Determine the optimal combination of investments, such as stocks and bonds. Also, consider your risk tolerance and investment timeline. Once you’ve got your plan, you check in occasionally to adjust things back to your original mix


Think of it as a “set and forget” approach that also spreads your bets to reduce risk and potentially up your earnings. For instance, if stocks usually give you a 10 per cent return and bonds about 5 per cent, splitting your investments half and half could give you an average of 7.5 per cent return.

2) Constant-Weighting Asset Allocation

Strategic asset allocation generally implies a buy-and-hold strategy, even as the shift in values of assets causes a drift from the initially established policy mix. For this reason, you may prefer to adopt a constant-weighting approach to asset allocation. With this approach, you continually rebalance your portfolio. For example, if one asset declines in value, you would purchase more of that asset. And if that asset value increases, you would sell it.

3) Tactical Asset Allocation

There are no hard-and-fast rules for timing portfolio rebalancing under strategic or constant-weighting asset allocation. But a common rule of thumb is that the portfolio should be rebalanced to its original mix when any given asset class moves more than 5 per cent from its original value.

Tactical asset allocation adds a twist to the usual plan by letting you make short-term moves to grab unique investment chances. It’s like having a flexible strategy that lets you take advantage of good market conditions for certain investments.

Think of it as being a bit active with your investments. You still have your main plan, but you can step away from it briefly to make some gains, then return to your original strategy. It requires discipline to know when to jump on these opportunities and when to step back to your long-term mix.

4. Dynamic Asset Allocation

Dynamic asset allocation is all about staying on your toes with your investments. Instead of sticking to a fixed plan, you’re always adjusting based on what the market is doing.

It’s a strategy that relies on the gut feeling of a portfolio manager rather than sticking to a set mix of assets. When things go up, you buy more assets, and when they go down, you sell some off.

Unlike some other strategies, there’s no holding back here. For instance, if stocks start looking shaky, you might sell some off expecting them to drop more. But if the market’s going strong, you’d jump in and buy more stocks for expected gains.

5) Insured asset allocation

Insured asset allocation is like having a safety net for your investments. You set a minimum value for your portfolio that you never want it to drop below. If your investments do well and go above this minimum, you actively manage your portfolio, using research and judgment to make decisions that aim to grow it even more.

But if your portfolio ever falls to that minimum value, you switch gears. You move your money into low-risk assets, like Treasury bonds, to lock in that minimum value. Then, you might rethink your whole investment approach with the help of your advisor.

This strategy works well for cautious investors who want some active management but also want the security of knowing their investments won’t fall below a certain level. For example, someone planning for retirement might find insured asset allocation perfect for making sure they always have a reliable income.

Investors have many options for allocating their investment funds:

Equity: Investing in stocks is very risky, but can offer high returns that beat inflation over time.

Debt: Bonds and other debt securities to your portfolio gives you stability. They have lower risk and moderate returns.

Gold: Gold always goes up during uncertain times like pandemics, wars, or economic downturns. It’s a safe bet and a hedge against inflation.

P2P Lending: P2P lending, is a relatively newer asset class gaining popularity. It involves individuals lending money directly to other individuals through online platforms, bypassing traditional financial institutions. P2P lending provides attractive returns compared to traditional fixed-income investments like bonds and is less riskier than equity.

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In conclusion, asset allocation can be as active or passive as you want it to be. Whether you stick to a specific strategy or mix things up depends on your goals, age, what you expect from the market, and how much risk you’re comfortable with.

Keep in mind, these are just general suggestions for how you might approach asset allocation.

(This article is part of IndiaDotCom Pvt Ltd’s Consumer Connect Initiative, a paid publication programme. IDPL claims no editorial involvement and assumes no responsibility, liability or claims for any errors or omissions in the content of the article. The IDPL Editorial team is not responsible for this content.)

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