2 Key Strategies for Asset Allocation
If you have a stock portfolio, how do you decide when to buy stocks, when to sell stocks and keep cash in your portfolio. This is the underlying problem behind asset allocation. Research shows that a high percentage of asset allocation variance determines that the portfolio's earnings are related to asset allocation decisions. There are some strategies to deal with these issues. This article describes two key strategies that you can consider.
Let's look at the first key strategy in the asset allocation – the invariant combination strategy. The basic buy principle of the strategy is to buy the stock when the market falls and sell when the market rallies. It's like a reverse strategy. The constant number in this strategy name refers to the principle of asset allocation, even if the ratio of stock to total assets remains the same.
Let us through an example to explain the constant hybrid strategy. Assuming your portfolio is worth $ 100 million, of which 60% is stock and 40% is cash. The total asset value of your shares will be 60%. Say 60% is the constant ratio you want to maintain. When the market goes down, your stock falls by 10% or $ 6,000 to $ 54,000, and what happens when your total assets fall to $ 94,000. In order to keep your asset ratio at 60%, you need to hold $ 94,000 or 60% of $ 56,400, which means you need to buy another $ 2,400 worth of stock.
As can be seen from the above example, this strategy will encourage you to buy more stocks in the down market. The strategy can be used in normal market conditions and is suitable for investors who can tolerate the decline in portfolio value during the downtrend market.
The second key strategy is called the constant proportional insurance strategy. The basic buy principle is just the opposite of the constant mix strategy – when the market falls when the stock is sold and bucket when the market bounces. When we need to protect our portfolio, this strategy is very useful in the super bull market and the super bear market. The term insurance is the principle of insurance portfolio, which we will see in the following example. The amount of money invested in the stock is the ratio of the total assets minus the reserve price or the multiplier, where floor is the minimum portfolio value to be held. This formula is the case, the multiplier x (total assets – the reserve price).
Borrow the same example, assuming that the multiplier is 2, floor is $ 70,000, so we invest 2 x ($ 100,000- $ 70,000) or $ 60,000. If the market falls 10%, our stock value will drop to $ 54,000, and the investment amount should be $ 2 ($ 94,000-70,000) $ 48,000 or. This means that $ 6,000 of the stock needs to be sold in cash to restore the cash level to $ 46,000. We will continue to sell the stock and hold the cash until the asset reaches $ 70,000, which is the lowest value of our portfolio.