Investing a portion of your earnings can help you build a solid portfolio and ensure a stable financial future. Strategic asset allocation can help you achieve long-term investment success. So, what is strategic asset allocation?
Greenway Financial Advisors LLC is a team of experienced financial advisors serving clients throughout Massachusetts. If you need strategic asset allocation explained, consult our guide below.
The Definition of Strategic Asset Allocation
What is strategic asset allocation, or SAA? It is an investment portfolio strategy that assigns or allocates investments into different asset classes. SAA also involves reallocating periodically when target investment exposures stray too far from target weights. This may be due to varying returns (e.g. historically, riskier diversified equity investments have provided higher returns than their less risky fixed-income counterparts), or changes in life circumstances (e.g. spending desires increase or decrease).
The investment vehicles investors use to diversify their portfolios may include cash, fixed-income assets, equities, etc. The goal with strategic asset allocation is to achieve long-term financial objectives while balancing risks and rewards.
The Importance of Strategic Asset Allocation
Strategic asset allocation is a foundational investment approach that plays a critical role in achieving long-term financial goals.
Let’s say you want to save to buy a new car next year. In that case, you may consider investing your savings in cash or short-term bonds. However, if you want to diversify your portfolio to save for retirement, you may choose to invest in stocks so that they can ride out any short-term fluctuations in the market.
One of the key benefits of strategic asset allocation is risk management through diversification. It also helps maximize long-term returns by balancing various investment types over an extended period.
What Impacts Strategic Asset Allocation?
After learning the answer to “What is strategic asset allocation?” it is helpful to understand the factors that influence it.
Investment Horizon
It’s not unusual for investors with a longer investment horizon to allocate their investments to riskier asset classes. However, this investment strategy has a distinct purpose.
When investors have a longer investment horizon, they’re in a better position to hold on to their assets during dips in market conditions. That means they’re less likely to have to liquidate their assets to accommodate their cash or retirement needs.
Risk Tolerance
The higher risk tolerance an investor has, the more stable they’ll be during volatile market conditions. As such, stocks may have a greater asset class weight, while cash and bonds have a lower asset class weight. The opposite is more likely for an investor with a low risk tolerance.
Return Objectives
Strategic asset allocation weights vary by asset type. The desired returns also affect weights.
Let’s say the return profiles for stocks, bonds, and cash are 8%, 2%, and 0%, respectively. If you wanted to create an investment portfolio that generates an annual expected return of 6.5%, your weights would likely be 75% for stocks, 25% for bonds, and 0% for cash.
In other words, your desired return will influence the SAA weight. The higher your expected return, the higher asset allocation you’ll need to assign to a specific asset class.
The Risks of Strategic Asset Allocation
When answering “What is strategic asset allocation?” you need to understand its risks. All investments carry some level of risk, and strategic asset allocation is no different. A significant risk to any investor is not appropriately aligning investment time horizon to the investments they own.
Our primary goal is to construct an investment solution with the least amount of risk possible to satisfy a family’s spending & giving desires. This is done by aligning “investment policy” to “spending policy”. Near-term or essential financial priorities are to be funded using low-volatility cashflow streams and investments. Portfolio “risk” (and resulting volatility) is predominately assumed for financial priorities that are either (a) happening well into the future (“time horizon”) or (b) not essential to a family’s wellbeing (“discretionary”).
By quantifying “how much do I need?” and “do I have enough?” we’re able to tailor investment portfolios to provide sufficient levels of cashflow all while minimize portfolio risks. Our clients have the peace of mind that they have a runway of protective investments in their investment portfolio that they can spend down, in the event of an adverse economic or market environment.
We Help Clients Get Closer to Their Financial Goals
Now that you know the answer to “What is strategic asset allocation?” turn to Greenway Financial Advisors LLC. We provide financial and retirement planning services to families, individuals, and retirees in Massachusetts. We consider all aspects, from social security benefits to current tax breaks, to help our clients achieve their financial objectives now and in the future.
If you’re interested in an effective investment strategy with asset allocation, contact our certified practitioners at Greenway Financial Advisors LLC at (339) 234-9098 to schedule a consultation.
Written Content Disclosures:
The information presented in this written communication is the opinion of the author and does not reflect the views of any other person or entity unless specified. The information provided is believed to be reliable and obtained from reliable sources, but no liability is accepted for inaccuracies. The information provided is for informational purposes and should not be construed as advice. Advisory services offered through Greenway Financial Advisors LLC, an investment adviser registered with the states of California, Massachusetts & New Hampshire.
Recorded Presentation Disclosure:
Information presented was believed to be factual and up-to-date as of the date of recording, but no guarantee is made to its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Discussions and answers to questions do not involve the rendering of personalized investment advice, but are limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the subjects presented.
Advisory services offered through Greenway Financial Advisors LLC, an investment adviser registered with the states of California, Massachusetts & New Hampshire. For disclosure information please visit: https://adviserinfo.sec.gov/
