Definition
The term strategic asset allocation refers to an investment approach that rebalances the allocation of assets in a portfolio to achieve a long-term target. Strategic asset allocation typically involves moving the funds from over-performing asset classes to those that are underperforming.
Explanation
Strategic asset allocation, also known as SAA, refers to an investment strategy that adjusts the allocation of assets in a portfolio in order to achieve long-term targets. This strategy is typically used with investments such as mutual funds, index funds, and hedge funds.
The objective of SAA is to maintain a mix of asset classes that are aligned with the investor's desired risk exposure. If the funds in one asset class grow faster than another, the allocation of funds will differ from the original targets. As this occurs, SAA would periodically move the funds from the over-performing asset classes to those that are underperforming.
For example, an investor's risk profile and longer-term investment objective might suggest 60% of their funds be allocated to common stock, while 40% is allocated to fixed income securities such as bonds. Over time, the percentage of funds invested in common stocks grows to 65% of the portfolio's assets. If the investor still desires to allocate 60% of their funds to common stock, they would sell stock and purchase additional bonds; thereby rebalancing their portfolio to once again achieve the 60% / 40% split.
Related Terms
tactical asset allocation, vanilla strategy, momentum strategy, balanced investment strategy, Halloween strategy
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