Asset Classes and Strategies
There are many types of assets that may or may not be included in an asset allocation strategy:
- cash and cash equivalents (e.g., deposit account, money market fund)
- fixed interest securities such as Bonds: investment-grade or junk (high-yield); government or corporate; short-term, intermediate, long-term; domestic, foreign, emerging markets; or Convertible security
- stocks: value, dividend, growth, sector specific or preferred (or a "blend" of any two or more of the preceding); large-cap versus mid-cap, small-cap or micro-cap; public equities versus private equities, domestic, foreign (developed), emerging or frontier markets
- Commodities: precious metals, broad basket, agriculture, energy, others
- commercial or residential real estate (also REITs)
- collectibles such as art, coins, or stamps
- insurance products (annuity, life settlements, catastrophe bonds, personal life insurance products, etc.)
- derivatives such as long-short or market neutral strategies, options, collateralized debt and futures
- foreign currency
- venture capital, leveraged buyout, merger arbitrage or distressed securities
There are several types of asset allocation strategies based on investment goals, risk tolerance, time frames and diversification: strategic, tactical, and core-satellite.
Strategic Asset Allocation — the primary goal of a strategic asset allocation is to create an asset mix that will provide the optimal balance between expected risk and return for a long-term investment horizon.
Tactical Asset Allocation — method in which an investor takes a more active approach that tries to position a portfolio into those assets, sectors, or individual stocks that show the most potential for gains.
Core-Satellite Asset Allocation — is more or less a hybrid of both the strategic and tactical allocations mentioned above.
Systematic Asset Allocation is another approach which depends on three assumptions. These are-
- The markets provide explicit information about the available returns.
- The relative expected returns reflect consensus.
- Expected returns provide clues to actual returns.
Read more about this topic: Asset Allocation
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