Key Takeaways
- Strategic asset allocation is an investment strategy that seeks to balance risk and reward in one’s portfolio.
- With tactical asset allocation, there is more of a willingness to divert assets to shorter-term investments that could produce a higher return.
- Such allocations may change over time, as parameters change, and are based on the investor’s goals, risk tolerance, and time horizon.
One’s investment strategy is crucial as a road map for making informed decisions regarding fund allocation and risk management. One such strategy is called strategic asset allocation. What that is, is explained below.
What is Asset Allocation?
Asset allocation generally involves dividing one’s investments among varying assets, such as cash, stocks, and bonds.
What is Strategic Asset Allocation?
More specific than asset allocation, strategic asset allocation is an investment strategy that seeks to balance risk and reward in one’s portfolio. It aims to accomplish this by adjusting the percentage of each portfolio asset. Such adjustments are based on investor risk tolerance, objectives, and time horizon.
There are other key types of asset allocation, including:
- Dynamic asset allocation. Strategic asset allocation involves establishment of an asset mix over the long term. With dynamic asset allocation, frequent portfolio adjustments are made in response to market condition changes.
- Tactical asset allocation. More of a buy-and-hold strategy, strategic asset allocation focuses more on long-term portfolio returns. With tactical asset allocation, though, there is more of a willingness to divert assets to shorter-term investments that could produce a higher return.
Understanding Strategic Asset Allocation
With strategic asset allocation, the investor establishes target allocations for varying asset classes. Periodically, the portfolio requires rebalancing to original allocations. This typically occurs when the original allocations significantly deviate from initial settings. Such deviations are caused by differing returns from the various assets.
Investor allocations may change over time, as parameters change, and are based on the investor’s goals, risk tolerance, and time horizon. Note that strategic asset allocation itself is based on what is called modern portfolio theory. This theory underscores the importance of diversification to lower risk and improve returns.
Example of Strategic Asset Allocation
Say that Linda seeks to create a financial plan for retirement. She aims to do this by investing $10,000 of her savings, with a five-year time horizon. Her allocation comes out to 60% public stocks, 20% fixed income, and 20% alternative assets.
Her investment distribution, thus, may look like this: $6,000/$2,000/$2,000.
Factors Affecting Strategic Asset Allocation
In strategic asset allocation, how allocations are targeted depend on the following factors:
- Risk tolerance. This is about how much of their original investment an investor is willing to lose in expectation of higher future returns.
- Investment horizon. This refers to the time period in which an investor expects to hold an investment.
- Return objectives. The investor must consider the return levels to which they aspire. That is based on whether they are investing for a certain reason or desire.
Strategic Asset Allocation and Investing in Art
As a long-term investment, investing in art can be part of a strategic asset allocation strategy.
After all, as an alternative investment, art as an asset class is generally less volatile since it is not directly correlated with turbulent public markets.
One way to invest in art is through the alternative investment platform Yieldstreet, on which $4 billion has been invested. Featuring a 9.6% IRR, Yieldstreet has the broadest selection of alternative asset classes available, with opportunities including art, real estate, and more. Through them, investors can put capital in art without the responsibility that comes with owning physical pieces.
Such funds make all strategic decisions, including what art is bought and when it is sold. This relieves the investor of having to gain expertise in the art market before participating in it. Yieldstreet’s highly vetted artworks undergo expert third-party appraisals before being placed in a fund. The offerings target a net annualized return of 15% to 18%.
Investing in art also serves another crucial purpose: portfolio diversification. Building a more modern investment portfolio of asset classes of varying types and expected performances can mitigate risk. It can also improve returns and protect against inflation.
Alternative Investments and Portfolio Diversification
Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.
Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.
In some cases, this risk can be greater than that of traditional investments.
This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million. These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.
However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments.
Moreover, investors can get started with a relatively small amount of capital. Yieldstreet has opportunities across a broad range of asset classes, offering a variety of yields and durations, with minimum investments as low as $10,000.
Learn more about the ways Yieldstreet can help diversify and grow portfolios.
In Summary
As a long-term investment strategy, strategic asset allocation can potentially reduce the effect of market fluctuations, including market downturns. A key limitation with the approach, though, is that it does not consider non-investor factors. It only considers the investor’s profile.
What's Yieldstreet?
Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.
2 Represents an net annualized return, using an internal rate of return (IRR) methodology, with respect to the matured investments shown in your Portfolio experience, utilizing the effective dates and amounts of subscriptions and distributions to and from the investments, net of management fees and all other expenses charged to the investments.[read more]