What is Strategic Asset Allocation?

Strategic asset allocation is a long-term investment strategy that focuses on setting and maintaining a predetermined mix of assets in a portfolio, tailored to an investor’s goals, risk tolerance and time horizon. By diversifying across various asset classes – such as stocks, bonds, and cash – strategic asset allocation aims to balance risk and potential returns over time. Unlike tactical asset allocation, which adjusts positions in response to market conditions, strategic asset allocation remains relatively stable, only rebalancing periodically to keep the portfolio in line with its original targets.

If you need help with your asset allocation, consider working with a financial advisor.

Strategic Asset Allocation Defined

Strategic asset allocation is a more traditional way to think about asset allocation from a long-term perspective. Rather than attempting to time the market or chase trends, the focus is on keeping the balance between stocks and bonds in a portfolio aligned with a predetermined target. For example, you may be aiming for a consistent mix of 60% stocks and 40% bonds or 30% bonds and 10% cash.

This type of allocation strategy is based on modern portfolio theory, which calls for using diversification to create an optimal risk-reward profile. In other words, the goal is getting the best returns while exposing yourself to just the right amount of risk.

As a portfolio management option, strategic asset allocation could be suited to:

Buy-and-hold investors who are hoping to capitalize on price appreciation over time
Beginner investors who want to use a passive approach for asset allocation
Investors who have a longer time horizon to recover from market downturns
Beginners who have limited investment experience and want a simplified way to manage allocation
Investors who tend to make emotional decisions with their portfolios

That last group is important because emotional investing can be problematic. If you panic and sell during a market drop because everyone else is selling, you could miss out on reaping returns later when the market picks back up. Or, you might miss opportunities to buy into the market at a prime time out of fear of making the wrong move.

Strategic asset allocation can eliminate those kinds of headaches. Rather than trying to keep up with market trends and which way prices are moving, you’re focused on set of numbers only: your target allocation.

How Strategic Asset Allocation Works

The mechanics of strategic asset allocation are relatively simple. You choose your target allocations and then rebalance your portfolio as needed to keep your holdings aligned with those targets. How you set those targets depends on several things, including your age, risk tolerance, investment goals and time horizon for investing.

The targets can change as you get closer to retirement. For example, an investor who’s 30 years old might be comfortable with a 90% stock, 10% bond or cash portfolio. But at age 50, their target allocation might be 60% stocks and 40% bonds or cash if they’re planning to retire in the next 10 to 15 years.

Rebalancing is what helps you keep the numbers where you want them to be. So say you have $500,000 in your portfolio and you’re aiming for a 70% allocation to equities. Stocks have a particularly good year, pushing your stock allocation to 80% instead. Using strategic asset allocation, you would want to adjust your portfolio back to the 70% mark by selling some of your stock holdings and reinvesting in bonds or cash.

A key part of making strategic asset allocation work for you is knowing where your targets should be and how often you should rebalance to meet them. For example, if you’re more of a hands-off investor you may only think about rebalancing once each year. But if you want to invest passively while still feeling connected to what’s happening with your portfolio, you might rebalance every six months or quarterly.

Strategic Asset Allocation vs. Other Allocation Strategies

Strategic asset allocation involves setting a fixed mix of assets to reflect an investor’s risk tolerance and objectives, with periodic rebalancing to maintain the original target weights. This approach is largely passive, favoring a steady allocation that doesn’t react to market fluctuations, which can help investors stay focused on long-term goals.

In contrast, tactical asset allocation takes a more active approach, adjusting allocations based on short-term market conditions or economic forecasts. Tactical allocation aims to capitalize on temporary opportunities, which may lead to higher returns but also increases exposure to market timing risks.

Dynamic asset allocation, another active strategy, continuously adjusts a portfolio’s asset mix in response to changing market trends and economic conditions. Unlike tactical adjustments, which may be occasional, dynamic allocation is more fluid, often shifting to align with evolving risks or growth potentials.

Each strategy offers a distinct approach to asset management: strategic allocation prioritizes consistency, tactical allocation seeks to leverage current trends and dynamic allocation adapts regularly to meet current market realities. The right choice depends on an investor’s goals, time horizon and tolerance for risk and market volatility.

Putting Strategic Asset Allocation to Work

If you’re thinking strategic asset allocation might be a good fit, there are a few things to consider before diving in. Specifically, ask yourself:

How long you have to invest and grow a portfolio
What level of risk you’re most comfortable with versus how much risk you need to take to reach your goals
Whether you’re more focused on growth, income or some of both

From there, you can begin building a portfolio of investments around strategic asset allocation. Remember, that means looking at more than just stocks and bonds as a whole. You should also be breaking those asset classes down further into subclasses, such as small-cap versus mid-cap stocks and municipal bonds versus corporate bonds. Each one has its own risk and reward profile so it’s important to know how likely a particular type of stock or bond is to meet your investing needs.

Bottom Line

Strategic asset allocation offers a way to build an investment portfolio and reach your financial goals passively. Whether it’s right for you depends largely on what you want to achieve with your portfolio and whether you’re more interested in playing a hands-on or hands-off role in growing wealth for the long-term.

Asset Allocation Tips

Consider talking to a financial advisor about strategic asset allocation and what it can (or can’t) do for you. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.
A risk tolerance questionnaire or asset allocation calculator can be a good starting point for helping you identify how much risk you’re comfortable with. But you may not want to rely on them solely to guide your investment choices. You should also take into account your personal financial situation since factors such as whether you’re married, how much debt you have and what kind of lifestyle you hope to have in retirement can affect asset allocation choices.