Asset allocation is the process of dividing an investment portfolio among different asset categories such as stocks, bonds, real estate, and cash, based on an investor’s goals, risk tolerance, and investment horizon. The purpose of asset allocation is to minimize the overall risk of the portfolio while maximizing its potential return.
Asset allocation strategies can be divided into static asset allocation strategies that pursue profits despite various market conditions, dynamic asset allocation strategies that take into account market timing, and asset allocation strategies that take into account various factors. Traditional asset allocation strategies include Classic 60-40 Portfolio (CP), Permanent Portfolio (PP), and All Seasons (AS). These portfolios operate in a way that maintains the same proportion without performing a separate stock replacement even if market conditions change.
Dynamic asset allocation (DAA) is an investment strategy that involves making short-term adjustments to an investment portfolio’s asset allocation in response to changing market conditions or economic outlook. Unlike static asset allocation, which typically involves maintaining a fixed asset allocation over a longer period, DAA involves a more active approach to portfolio management.