Series 65: Strategic Asset Allocation

Strategic Asset Allocation

Under a strategic asset allocation model, an adviser and client work together to design an ideal mix (on a percentage basis) of major asset classes and sub-classes. Their goal is the optimal level of portfolio performance (growth, income, capital preservation, and tax benefits) given a client’s investment goals.

One of the biggest questions when using the strategic asset allocation technique is what division of assets to use. Two primary methodologies involve allocating by style and allocating by asset class.

An allocation by style uses categories such as growth and value stocks. An allocation by asset class may use the larger categories of stocks and bonds and further subdivide by types of stocks and bonds (preferred stocks, international stocks, corporate bonds, government bonds, etc.). Quite often, portfolios are strategically allocated into smaller subcategories that are a mix of both style and asset class, such as value stocks, growth stocks, investment grade corporate bonds, corporate junk bonds, etc.

Here’s a basic example of strategic asset allocation: A client decides that she wants to invest a $100,000 portfolio into:

• • 60% stocks
• • 20% government bonds
• • 10% corporate bonds
• • 10%