Understanding Asset Allocation Strategies
One key differentiator in the crowded world of wealth management is our disciplined use of tactical asset allocation strategies that target relative strengths across various asset classes. We overlay this atop a comprehensive understanding of your risk tolerance, investment goals, and financial plan to achieve returns personalized to your needs. You will hear us talk often about tactical versus strategic allocation strategies, so we want to take some time to give you a more in-depth look at what we mean.
ASSET ALLOCATION STRATEGIES
Asset allocation is the primary risk reduction tool that we use when constructing your portfolio.
So what does asset allocation mean? In simple terms, it is how your money is divided between different types of investments, usually cash, fixed income, and equities.
To use an example, let's say your portfolio is a car and much like buying a real car, they are each built for a specific purpose. If you want a Corvette, you would expect a very fast car but one that rides pretty rough. On the other hand, if you want a Cadillac, it probably won't go nearly as fast but has a much smoother ride. Okay, so let's translate that into your investments. In the above example, the "engine" of our car is stocks (it's what make the portfolio potentially go fast). The "shocks" are bonds and CDs in our portfolio, because that's what makes the ride smoother when the economy hits a rough patch. There's one last thing that no car is sold without, and something you hope you never use, and that's the "spare tire." In the investment world, that is called “Alternative Investments.” You hope you never need them, but if you have a blow-out on the investment freeway you will be glad you have something in your portfolio that will allow you to get to the next portfolio service station.
So now that we know what the different parts of the asset allocation are, we can now decide if we want to build a "fast" portfolio (more stocks) or have a more "comfortable" portfolio (more bonds). The mix gives us our portfolio and what to expect as far as risk and return. The more stock you have, typically the more volatility (ups and downs) you will have. Conversely, the more bonds you have, the less volatile you would expect your portfolio to be.
NOW WE LOOK AT OUR BELIEF SYSTEM
There are several ways to implement asset allocation, depending on your view of the world. The first type of Asset Allocation is Strategic Asset Allocation. This, in our opinion, is the minimum you should do when managing your portfolio. It is the process of dividing up the allocation "pie," then periodically rebalancing to keep the asset allocation in line.
Next is Tactical Asset Allocation, where you have your strategic allocation and overlay a view of what is going on in the world and how your portfolio should be adjusted to reflect the current happenings. Think of it as a pendulum that moves back and forth (tactical swings) around the middle point (strategic allocation). If the economic backdrop is negative, your portfolio will probably be more conservative, if we are in a recovering economy, it will be positioned more for growth. That continuous process of evaluating the current environment is the what Tactical Asset Allocation is all about, trying to find value in the current environment while at the same time avoiding those asset classes that appear over-valued.
Finally, Core-Satellite is a mixture of the previous two strategies. It involves having a Core Asset Allocation (strategic) and also having a percentage of the portfolio with a more tactical approach. Think of it as the Earth (strategic allocation) and the Moon (tactical allocation). The strategic allocation is the more constant part of the portfolio while the tactical allocation moves around given what is going on in the world.
Madison Park Capital Advisors believes that having a tactical asset allocation is beneficial because it enables you to adjust your portfolio to current market conditions, versus just having a static portfolio. We are continually looking for value in every market, whether fixed income or equity markets and trying to stay away from over-valued asset classes.