Strategic asset allocation: A long-term investment strategy for lasting growth

Strategic asset allocation — also known as SAA — is a long-term investment strategy that involves setting target allocations for various asset classes, such as bonds, stocks, and cash. This asset allocation strategy is designed to remain relatively stable over time and only be periodically adjusted — for example, semi-annually or annually — through portfolio rebalancing. Like most investment strategies, strategic asset allocation is based on your financial goals, risk tolerance, and investment time horizon.

One key characteristic of the strategic asset allocation strategy is that it is considered a passive approach, meaning it does not try to time the market but instead maintains a consistent allocation regardless of short-term market fluctuations. It is used to diversify a portfolio while generating the highest rate of return at a tailored risk level — from conservative to aggressive. This strategy is curated to weather market ups and downs and perform over years and decades. Periodic adjustments — or rebalancing — help to bring the portfolio back to the original target allocation if market movements cause it to shift.

Let’s consider a hypothetical example of strategic asset allocation. Alex has a $500,000 portfolio and wants a SAA of 60% stocks, 30% bonds, and 10% cash, and plans to rebalance annually.

Alex’s initial portfolio looks as follows:

After one year, Alex had the following annual returns: 

• Stocks: + 15%

• Bonds: - 5% 

• Cash: + 1% (e.g., high-yield savings account or certificate of deposit, CDs)

Alex’s new, unbalanced, portfolio after one year looks as follows:

In this case, stocks have grown faster than the other asset classes, so they now make up a larger portion of the portfolio, exceeding the target rate of 60%. To rebalance the portfolio and return to the original 60/30/10 allocation on the total new value of $538,000, Alex’s portfolio would look as follows:

Therefore, to successfully rebalance, Alex would need to: 

• Sell $22,200 of stocks → to reduce the value from $345,000 to $322,800

• Buy $18,900 of bonds → to raise the value from $142,500 to $161,400

• Add $3,300 to cash savings → to bring the value from $50,500 to $53,800

By selling stocks, buying bonds, and adding to cash savings, Alex’s portfolio would be successfully rebalanced to the initial 60/30/10 asset allocations. This would then be repeated the following year, adjusted to how the new portfolio would look. The goal after every year — Alex’s set rebalancing timeline — would be to get back to the original asset allocation goal.

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There are many factors that can affect the weight of your asset classes in strategic allocation planning. However, one of the benefits of strategic asset allocation is that you can specifically tailor your strategy to meet your unique goals. This is crucial to more effectively meet your investment goals.

The top three influences to consider are the following:

Your financial goals, such as saving for retirement, buying a house, or funding education, will greatly shape your allocation strategy. Different goals may have different timelines, income needs, and acceptable levels of risk, which are considered in SAA to create a consistent, long-term investment framework.

Financial goals and objectives might change over time, so it is important to adjust your SAA strategy to meet your new targets. Utilizing an SAA strategy can help you invest more aggressively or conservatively based on your unique circumstances to help you meet your objectives.

Risk tolerance refers to how much volatility or potential loss an investor is willing and able to handle. Someone with a higher risk tolerance might have a portfolio with more equities (such as stocks), while someone with a lower risk tolerance might favor bonds or cash equivalents instead.

Strategic allocation should ideally align with your comfort level to ensure long-term discipline and emotional resilience during market swings. Your risk tolerance will also heavily influence how your asset classes are divided.

Time horizon refers to the length of time an investor expects to hold a portfolio before needing to access the funds. Longer time horizons often allow investors to take more risks, since there is more time to recover from market downturns. For example, someone in the early stages of their career might follow a SAA strategy composed mainly of stocks, while someone nearing retirement might have a portfolio consisting mainly of bonds and cash.

Your goals can also shape your time horizon. Shorter time horizons usually require more conservative allocations focused on capital preservation compared to longer time horizons.

Strategic asset allocation is often used to help plan for retirement. SAA provides portfolio diversification, which can help minimize risk and maximize returns — something that is especially crucial when approaching or during retirement. This strategy can help retirees rearrange their portfolio to preserve capital, maintain income, and minimize risk. However, it is important to note that everyone has different goals for retirement, so you should tailor your asset allocation in retirement to match your situation.

Creating an investment strategy or wealth management plan that aligns with your situation and goals takes time. It is crucial to consider your risk tolerance, time horizon, and financial situation to determine how to allocate your assets. Strategic asset allocation can help you better manage your portfolio to get closer to meeting your goals.

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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.