Asset Allocation: Policies & Procedures

Asset Allocation: Policies & Procedures

Asset allocation is the process of dividing an investment portfolio among different asset categories such as stocks, bonds, and cash. It is a key component of portfolio management that aims to balance risk and return based on an investor’s goals, risk tolerance, and investment horizon. The asset allocation decision is typically the most important factor in determining the long-term performance of an investment portfolio.

Asset allocation policies and procedures refer to the guidelines and processes that investment managers use to determine the appropriate mix of assets for a client’s portfolio. This includes determining the percentage of assets to allocate to each asset class and selecting specific investments within each asset class. These policies and procedures are designed to ensure that the portfolio is properly diversified, taking into account the client’s risk profile and investment objectives.

The asset allocation process involves ongoing monitoring and rebalancing of the portfolio to maintain the desired asset mix. This is necessary because asset classes can perform differently over time, and as a result, the portfolio’s asset allocation can become skewed. Rebalancing involves selling assets that have performed well and buying assets that have underperformed to bring the portfolio back in line with the target asset allocation. By following a disciplined asset allocation policy and procedure, investment managers can help their clients achieve their investment objectives while managing risk.

 

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