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Puneinvest > Blog > Financial Planning > Strategic Asset Allocation
Financial Planning

Strategic Asset Allocation

Last updated: 2022/12/30 at 8:24 PM
Rajendra Todkar Published December 27, 2022
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Strategic Asset Allocation

Strategic asset allocation is an investing tactic that was inspired by Markowitz's theory. The creation of a balanced and robust portfolio is the primary objective of the strategic asset allocation.

To do this, investors select a combination of investments that adapt to changing market conditions in different ways. Depending on their financial objectives, time horizons, and level of risk tolerance, investors choose different asset classes and allocate different amounts of capital to each.

Strategic asset Allocation strategy should be examined and rebalanced on a regular basis to ensure that it remains consistent with the investor’s goals and risk tolerance.

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When the asset allocation weights deviate considerably from the strategic asset allocation weights due to unrealized gains/losses in each asset class, rebalancing occurs.

Strategic asset allocation is the process of constructing an ideal long-term portfolio (5-10 years) by asset class, based on long-term expected returns.

Strategic asset allocation is the most important driver of long-term return stability. It explains more than 75% of the volatility in returns with security selection.

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Retail investors are typically more concerned with the short term. Market trading opportunities abound as a result of the most recent economic, financial, or political news. Nothing is wrong with that.

However, if you need to develop a portfolio with a long-term return objective, you should also define a strategic asset allocation methodology. Long-term investing and short-term trading can complement each other.

Example- Strategic Asset Allocation

Rahul stated in his investment policy statement that he prefers a strategic asset allocation of 60% stocks, 30% bonds, and 10% gold. Rahul's portfolio is worth ten lakh rupees, and he rebalances it annually.

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His portfolio at the start of the year looks like this:

Asset ClassWeightPortfolio
Equity /Stock60%6,00,000
Debt30%3,00,000
Gold10%1,00,000
Portfolio Value100%10,00,000

After 1 year, equities generated a 12% return, Gold generate 8%, and bonds generated a 6% return.

The following is Rahul's unbalanced portfolio:

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Asset ClassWeightPortfolio
Equity /Stock61.20%6,72,000
Debt28.96%3,18,000
Gold9.84%1,08,000
100%10,98,000

For Rebalance portfolio, Rahul sell equity portion 13,200 & added in Debt 11,400 & Gold 1,800.

Asset ClassWeightPortfolio
Equity /Stock60%6,58,800
Debt30%3,29,400
Gold10%1,09,800
100%10,98,000

To maintain consistency in the allocations, investors frequently rebalance their strategically allocated portfolios on a regular basis.

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This is due to the possibility that the initial allocations may become unbalanced in the long run as a result of the variations in returns from each asset class.

The most crucial investing choice a person makes is strategic asset allocation.

It has shown to be successful, but it needs that investors stick with it and avoid making rash, emotional decisions based on the market's current condition.

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By Rajendra Todkar
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Rajendra Todkar is an experienced finance, investment, and insurance writer with a passion for educating readers about personal finance and helping them make informed decisions. With over 15 years of dedicated experience in the field, Rajendra Todkar has established a strong reputation for providing valuable insights and practical advice.
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