Dynamic Asset Allocation
Dynamic asset allocation is a portfolio management strategy that frequently adjusts the mix of asset classes to suit market conditions. Dynamic asset allocation is a strategy of portfolio diversification in which the mix of financial assets is adjusted based on macro trends, either in the economy, or the stock market. The stock and bond components of a portfolio might be adjusted based on the well-being of the economy, the health of a specific sector, or the presence of a broad-based bear or bull market. If most holdings in the portfolio are trending higher, a management strategy that favors buy-and-hold investing, such as constant-weighted asset allocation, may outperform dynamic asset allocation due to fewer transaction costs. Dynamic asset allocation is a portfolio management strategy that frequently adjusts the mix of asset classes to suit market conditions. An investment manager using dynamic asset allocation may decide to reduce a portfolio’s equity holdings and increase its fixed-interest assets to reduce risk.
What Is Dynamic Asset Allocation?
Dynamic asset allocation is a portfolio management strategy that frequently adjusts the mix of asset classes to suit market conditions. Adjustments usually involve reducing positions in the worst-performing asset classes while adding to positions in the best-performing assets.
How Dynamic Asset Allocation Works
The general premise of dynamic asset allocation is to respond to current risks and downturns and take advantage of trends to achieve returns that exceed a targeted benchmark, such as the Standard & Poor’s 500 index (S&P 500). There is typically no target asset mix, as investment managers can adjust portfolio allocations as they see fit. The success of dynamic asset allocation depends on the portfolio manager making good investment decisions at the right time. Dynamic asset allocation is just one portfolio management strategy available to investors.
Dynamic Asset Allocation Example
Suppose global equities enter a six-month bear market. An investment manager using dynamic asset allocation may decide to reduce a portfolio’s equity holdings and increase its fixed-interest assets to reduce risk. For example, if the portfolio was initially equities heavy, the manager may sell some of its equity holdings and purchase bonds. If economic conditions improve, the manager may increase the portfolio’s equity allocation to take advantage of a more bullish outlook for stocks.
Advantages of Dynamic Asset Allocation
Limitations of Dynamic Asset Allocation
Related terms:
Asset Class
An asset class is a grouping of investments that exhibit similar characteristics and are subject to the same laws and regulations. read more
Constant Ratio Plan
A constant ratio plan is defined as a strategic asset allocation strategy, which keeps the aggressive and conservative portions of a portfolio set at a fixed ratio. read more
Fixed-Interest Security
A fixed-interest security is a debt instrument such as a bond, debenture, or gilt-edged bond that investors use to loan money to a company in exchange for interest payments. read more
Momentum
Momentum is the rate of acceleration of a security's price or volume. Momentum generally refers to the speed of movement and is usually defined as a rate. read more
Mutual Fund
A mutual fund is a type of investment vehicle consisting of a portfolio of stocks, bonds, or other securities, which is overseen by a professional money manager. read more
Overlay
Overlay refers to an asset management style that uses software to harmonize an investor's separately managed accounts, preventing inefficiencies and ensuring strategies are implemented and coordinated correctly. read more
Portfolio Management
Portfolio management involves selecting and overseeing a group of investments that meet a client's long-term financial objectives and risk tolerance. read more
Research Analyst
A research analyst is a professional who prepares investigative reports on securities or assets for in-house or client use. read more
S&P 500 Index – Standard & Poor's 500 Index
The S&P 500 Index (the Standard & Poor's 500 Index) is a market-capitalization-weighted index of the 500 largest publicly traded companies in the U.S. read more
Tactical Trading
Tactical trading is a style of investing for the relatively short term based on anticipated market trends. read more