In theory, the asset allocation decision is driven by investors risk preferences and the statistical imperatives of diversification. 

It is often said that asset allocation is the most important investment decision that an investment manager faces. It is conventional wisdom, and is demonstrated in academic journals, that asset allocation has more influence on aggregate portfolio returns than any other single decision. Yet like blind men disagreeing on the nature of an elephant, different people use the term “asset allocation” for different purposes. It is interesting to note that many of the most flagrant errors in asset management are made at the asset allocation level by investors who are ill-positioned for turbulent markets or by those chasing the most successful recent strategies.

Asset allocation must be managed otherwise it is drifting on autopilot driven by the whims of the markets. If asset allocation is not consciously managed then the capital markets will manage it for us. The capital markets will assure that we are overexposed to asset classes at market highs and underexposed at market lows.

Asset allocation can be divided into three largely independent categories: (1) policy asset allocation, (2) tactical asset allocation and (3) dynamic strategies for asset allocation. Some may add a fourth category being strategic asset allocation which is longer than tactical asset allocation and shorter than policy asset allocation.

Your Financial Advisors (Investment Consultant) can help you structure and manage the asset allocation decision. Many of WALT ST’s Network Financial Advisors (Investment Consultants) offer Risk/Return profiling and/or Investment Policy Statements. 

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