The right asset allocation mix can provide ample opportunities for investors for tapping into the earning potential of equities while maintaining stability with debt instruments. However, decoding the right asset allocation formula can seem elusive especially for those who are still learning the ropes of market dynamics. Also, the story doesn’t simply end at fixing the right asset allocation mix – maintaining the right weightage of different assets is an equally important part of the game. There are various asset allocation strategies that you can deploy as an investor to pave the path for financial success.

In this strategy, the asset allocation mix is decided on the basis of the investor’s goals and risk tolerance levels. The fund manager focuses on keeping the established ratios of the different asset classes in the portfolio constant and tries to maintain those ratios regardless of market conditions or shifts in macroeconomic indicators. In the event of the weightages of different assets in the portfolio getting swayed from the predetermined ratios as a result of market movements, the fund manager may rebalance the portfolio. Reinstating the original allocation mix may entail the sale or purchase of assets – for instance when equities are in the green territory with values increasing, equity holdings may have to be reduced and investments may have to be shifted to debt instruments to maintain the static allocation.

Tactical asset allocation is an active portfolio management strategy and involves setting the composition of different assets keeping in mind an investor’s risk profile. However, unlike the static allocation method, the weightages of different assets are adjusted on occasions when market conditions are favourable to reap superior risk-adjusted returns in bursts. This method enhances investors’ chances of earning higher returns by taking advantage of certain market scenarios.

It is important to keep in mind that tactical asset allocation is different from portfolio rebalancing – while in the case of the latter changes are made in the portfolio as per the strategic allocation formula, tactical allocation involves tweaking the asset allocation mix from the strategic allocation in order to make the most of short-term opportunities when returns can be enhanced following which the allocation is reversed to the strategic one when those scenarios have passed so that the portfolio remains in line with the long-term investment objectives of the investors.

Unlike the tactical allocation strategy where the allocation mix is adjusted in a sporadic manner, dynamic asset allocation strategy is another active allocation strategy which requires perpetual changes to the asset allocation mix depending on market trends. Shifts in the asset mix are brought about in response to macro trends in the stock market and the economy with the objective of reducing allocations of assets that are underperforming and increasing weightages of assets that are exhibiting steady performances. For instance, if equities are in rocky terrain, a portfolio manager may sell off equity holdings and pump investments into assets that are lower risks so that the overall risk factor does not breach dangerous territory and when the scenario looks favourable for equities, he/she can increase the equity ratios in the mix.

The success of dynamic asset allocation strategy largely revolves around the portfolio manager’s ability to make the right investment decisions at the right time. Active adjustment of portfolio allocations can be time consuming and something that is not recommended for those who do not have investment expertise or have only a superficial knowledge of market dynamics. Frequent buying and selling of assets can also increase transaction costs for the investor.

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