What is the best asset allocation

When you want to invest your savings, it’s very important to consider risk management and investment diversification via adequate asset allocation. This is an actual strategy that allows one to understand how to distribute capital by investing in different products to minimise risk and optimise performance. Asset allocation consists of various models, and knowing them can help you to understand which one matches your needs and expectations as an investor. Therefore, let’s look at what types of asset allocation there are.

Strategic asset allocation is the distribution of the investment portfolio over the medium/long term. This choice means that, should there be any losses due to a number of risk factors, you can still rely on a long-term time frame to attempt a recovery by revising your previous investment choices.

The typical strategic approach of this asset allocation allows you to maximise profits with the possibility to minimise potential losses more easily.

If the long-term nature of strategic asset allocation can seem too rigid, you can choose tactical asset allocation, a distribution of asset classes over a short-term period. This strategic approach is particularly useful if it is used to modify and adapt strategic asset allocation based on what the market’s possible temporary fluctuations may be.

Breaking down investments using a tactical asset allocation involves constant monitoring of one’s own investments in order to understand whether various short-term opportunities have led to a tangible profit and, if necessary, integrate the portfolio with long-term asset classes.

Dynamic asset allocation is a type of investment distribution that is even more short-term and very sensitive to the state of the market. Dynamic asset allocation is often used when needing to adapt a portfolio to the market’s abrupt changes, constantly adjusting the mix of assets as soon as the markets go up or down or once the economy gets stronger or weaker.

For example, if the stock market slows down or suffers big losses, one can sell their own shares in anticipation of further losses by using dynamic asset allocation. Whereas, if the market is strong, one can purchase extra shares in preparation for market gains. 

Which is the best asset allocation for investments? This is the classic question a professional investor often asks himself. There is no specific asset allocation that is suitable for every investor; rather, there is personal asset allocation based on the socio-economic characteristics of each investor.

If you want to build your own asset allocation, the process is simple and consists of the following phases:

1. Time-frame setup phase within which you want to invest your savings;
2. Identifying objectives phase (in terms of expected risk/return based on your needs) to be completed within an identified time-frame;
3. Estimation and time-frame placement phase of financial needs that may require a divestment (for example, a child signing up to university or purchasing a new car);
4. Estimating prospects of various asset classes phase, in terms of expected risk/return amongst the various asset classes and in view of their correlations;
5. Defining a considered asset allocation phase to maximise/minimise one’s returns by establishing the essential conditions of one’s investment results (for example, invested imports must be positive);
6. Defining the frequency of monitoring and rebalancing your investments phase (frequency by which a number of single investments need to be returned to the origin).

In this way, you can have the perfect asset allocation for your investments