Strategic Asset Allocation

How to invest using static or fixed allocation for your portfolio.

Strategic Allocation is dividing your money into categories that do not change over time, or changes slowly. A Strategic Allocation is sometimes called "static allocation," "passive allocation," or "buy-and-hold."  For example, some investors use a static allocation of 60% stocks and 40% bonds for their assets.

 

Pros and Cons of strategic asset allocation

 

The Pros - Benefits of a strategic asset allocation

  • Easy to implement, since you only need to rebalance quarterly or annually to maintain your fixed allocation
  • Can be low cost if you use index funds or ETFs.
  • There can be a tax benefit since you are buying and selling infrequently

 

The Cons - Possible disadvantages of a strategic asset allocation

  • A strategic allocation does not take full advantage of changes in economic conditions. For example, if interest rates are rising (affecting bond prices) or if the economy is in recession (affecting stock prices), a strategic portfolio will continue to hold the same assets.
  • Strategic allocations may drop in value quickly if the stock market falls. For example, several strategic allocations dropped by over 40% during 2008-2009. 

 

Examples of Strategic Asset Allocation portfolio recipes

There are dozens of portfolio recipes that use a strategic (or static) allocation. Many of these portfolio recipes reflect the investment preferences of notable investors, investment companies, and analysts. Examples include the following:

  • Classic 60-40 Balanced Portfolio
  • Scott Burns' Couch Potato Portfolio
  • Harry Browne's Permanent Portfolio
  • Ray Dalio-inspired All-Weather Portfolio
  • Craig Israelsen's 7-Twelve Porfolio
  • Ben Stein's Portfolio
  • Benjamin Graham-inspired Portfolio
  • David Swensen-inspired Portfolio

 

How to implement a strategic asset allocation for your portfolio

1. Choose a Strategic Allocation "portfolio recipe."

Possible sources include the following:

 

2. Buy the funds or stocks needed for your portfolio recipe.

Typically, your portfolio recipe uses exchange-traded funds (ETFs) or mutual funds as ingredients. You can do this at a discount broker or full-service broker.

 

3. Rebalance on a quarterly or annual basis.

Rebalancing is buying or selling a portion of each asset so that the percentage allocation returns to the original allocation specified in the portfolio recipe. Since you are using a fixed allocation, you will not need to rebalance more often than quarterly. A portfolio-oriented brokerage can be useful for rebalancing, since they charge a flat fee each time you rebalance your portfolio, no matter how many buys or sells that requires.