HDMG - Asset Allocation Revisited Lesson

Asset Allocation Revisited

Now that we have an additional understanding of our investment options, let's review asset allocation. Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance, and investment horizon. Let's review our investment opportunities and see how they compare based on risk, return, and timeline.

Rebalancing Assets

In earlier lessons, we learned that asset allocation depended on your stage of life, your risk tolerance, and how soon you would need the money. Because your stage of life and your timeline for needing the money changes; your asset allocation cannot be static. In addition, the assets in your portfolio will grow at different rates which can distort the weights of your asset categories. For these reasons, rebalancing the assets in your portfolio is necessary.

Two forms of rebalancing are common. Calendar rebalancing occurs when an investor rebalances their portfolio on a regular basis, whether once a quarter, twice a year, or annually. The problem with calendar rebalancing is that it does not take into consideration the movement of the market and it is easy to put your portfolio even further out of balance with a swift market change.

Percentage-of-portfolio rebalancing is triggered when allocations move a certain percentage away from target allocations. Let's say you had a portfolio that contained 50% stocks, 40% bonds, and 10% cash. If your trigger was 10% and your asset values reached a point where you held 40 % stocks, 45% bonds, and 15% cash, you would rebalance your allocation. Rebalancing will also occur when your life stage changes because your target allocations will change.

Self-Assessment

Check your understanding with this activity.

 IMAGES CREATED BY GAVS