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Strategic Asset Allocation: A Guide to Building a More Resilient Investment Portfolio

Strategic Asset Allocation: A Guide to Building a More Resilient Investment Portfolio

May 10, 2024

Today's financial landscape is constantly changing and building a resilient investment portfolio is more important now than ever. This type of portfolio is designed to weather economic storms and market downturns, while still providing you with the growth you need to pursue your financial goals with confidence.

Think of a resilient investment portfolio like a shield of armor, working to protect your investments against the ups and downs of the market. It prioritizes stability and long-term growth over short-term gains. This could be done through diversification, strategic asset allocation, and regular rebalancing with a long-term perspective on building wealth.

Building a resilient portfolio requires planning and discipline, but may offer increased confidence knowing your investments might be better equipped to handle whatever the market throws your way. (If you need help building a portfolio, reach out to our team of financial advisors to get started.)

What is Strategic Asset Allocation?

Strategic asset allocation (SAA) is the strategy to decide the long-term mix of investments in your portfolio based on your risk tolerance and goals. This includes different asset classes—including stocks, bonds, and real estate—where your investments may go.

Think of SAA like this: When you pack for vacation, you don’t randomly throw clothes into a suitcase. You plan for the weather, what you’re going to do, and how long you’ll be gone. SAA does the same thing for your investments, allocating to appropriate areas with a plan, not just randomly dumping your investments into one place.

There's not a one-size-fits-all approach because SAA factors in your age, risk tolerance, and financial goals. (For example, a younger person with more risk might allocate more towards stocks for growth potential while someone nearing retirement might prioritize stability with a higher allocation towards bonds.)

The ultimate goal is a long-term perspective, setting your investments to grow over time as opposed to chasing short-term market trends.

Strategic vs Tactical Asset Allocation

Both strategic and tactical asset allocation are strategies for building an investment portfolio. Where they differ is in their approach and timeframe. 

Strategic asset allocation takes a long-term, more passive approach (think months, years, and decades) and is the foundation of your investment plan. This means it dictates your overall asset mix based on your risk tolerance and financial goals by establishing a set percentage allocation for each asset class (stocks, bonds, real estate). This allocation remains relatively constant over time, unless your circumstances significantly change.

Tactical asset allocation is more dynamic, focusing on short-term market conditions and potential opportunities. This approach requires active market monitoring and more frequent adjustments to your portfolio. It can be more time-consuming and involve more trading activity. Your goal is to outperform the market by capitalizing on short-term trends, but timing can be difficult and frequent trading comes with costs.

Strategic asset allocation is recommended for most investors and provides a stable, disciplined approach to investing. Tactical allocation with an advisor might be suitable for experienced investors comfortable with active management and short-term adjustments. 

Assessing Risk Tolerance

It’s important to know your comfort level when choosing investments and understand your emotional response to risk. If you get anxious with market dips, you may prioritize stability with a conservative portfolio. Someone who enjoys being on the edge of their seat might be okay with a higher risk tolerance.

A resilient portfolio is one you can stay committed to in order to avoid panicking and derailing your long-term goals. Some important factors to assess your risk tolerance include:

  • Your age: Younger investors might be able to handle more risk while older investors may focus on being more conservative.
  • Financial Goals: Short-term goals might require less risk, while long-term goals can benefit from some risk for growth potential.
  • Financial Situation: Your current income, savings, and debt levels all influence your risk tolerance.
  • Personality: Are you a risk-taker or a rule follower? Here’s where knowing yourself and your comfort level is an important component.

At Premier Financial, we can discuss your financial goals and help assess your tolerance for risk. Schedule a call with us today.


Maintaining an Asset Portfolio

Maintaining your asset portfolio involves important practices to keep you and your investments on track to pursue your long-term goals. It’s not just a one or two-time thing, but rather an ongoing process so your financial future essentially becomes a well-oiled machine.

Important practices to understand when maintaining your asset portfolio include:

  • Monitoring your performance by checking the value of your portfolio and the performance of individual assets. 
  • Rebalancing your assets by either buying or selling more assets to bring your portfolio back in line with your desired allocation (a mix of stocks, bonds, and more). Rebalancing aims to maintain your risk profile and investment strategy.
  • Understanding tax considerations and how your investment decisions impact your taxes. (Strategies like tax-loss harvesting—selling investments at a loss to offset capital gains—can help minimize your tax burden, for example.) 
  • Reviewing your risk tolerance to help ensure your portfolio remains aligned with your comfort level with risk.
  • Staying informed on economic trends, market conditions, and potential investment opportunities to make portfolio decisions.
  • Seeking professional guidance from a financial advisor for personalized advice on maintaining your portfolio. They’ll help you develop a comprehensive plan, choose suitable investments, and make adjustments as needed.

By following these practices, you can maintain a resilient asset portfolio that continues to work towards your financial goals over the long term. Consult one of our financial advisors today and let us help you work towards a more suitable retirement for your goals.