Strategic Asset Allocation

Strategic asset allocation is the backbone of a long-term investment plan. The investor chooses a target mix, such as 70% shares, 25% bonds and 5% cash, and sticks to it for years, changing it only when their circumstances or goals change.

The targets are based on expected long-term returns and risks of each asset type, and on how much short-term loss the investor can tolerate. They are not based on short-term market forecasts.

As markets move, the portfolio drifts away from its targets. If shares perform well, they might grow to 78% of the portfolio. Under a strategic approach, the investor rebalances, selling some shares and buying bonds, to return to 70%.

This disciplined approach helps investors avoid buying after markets have risen and selling after they have fallen, a common mistake driven by emotion. Many pension funds and long-term investors use strategic asset allocation as their main framework, sometimes adjusting it gradually as they approach a goal such as retirement.