Strategic Asset Allocation
Finding The Right Balance
At its core, the strategic asset allocation tries to strike the right balance to achieve capital growth while respecting the client's tolerance for risk. It also needs to align with the client’s time horizon, so it is a crucial aspect of portfolio management to get right.
In a perfect world, it would be possible to generate substantial returns in a short time without any risk to the capital invested. Unfortunately, we all understand that this is not reality.
Risk And Return
In general, the traditional formula to describe the correlation between risk and return states that the higher the risk, the higher the returns, and with low risk comes low returns. When you add an extended timeframe into the equation, the correlation starts to become less accurate.
Investments deemed to be lower risk and, correspondingly, generate lower returns, have a tendency to protect capital better and are usually known as being defensive. Some common defensive investments include cash deposits and bonds.
The lower the appetite to accept risks, the more defensive holdings and cash will likely be held in a portfolio which, in turn, will typically result in lower overall returns.
Growth assets have the potential to generate much higher profits than defensive assets on the whole, but with that potential comes added risk and more volatility. The principal investments used for this purpose are public company shares or stocks as they are also known.
People who are more comfortable with the risks associated with investing in stocks and shares, and have a longer time horizon in mind to counter, and wait out, the additional volatility are likely to receive substantially higher returns than can be seen with defensive assets.