Structure Your Portfolio Like A Professional. When it comes to structuring their portfolios, professionals usually speak of asset allocation. What is behind this term, why private investors should also actively shape their asset allocation and what programs and tools are available for this, you can find out in this article.
What is asset allocation?
Asset allocation describes the distribution of capital across various asset classes, such as stocks, funds or real estate. Asset allocation is asset structuring and serves to diversify risk.
Experts take into account the correlations between individual assets, which ideally balance each other out within a portfolio by correlating negatively. In other words, if the proceeds fall within one asset class, they tend to rise in another, since the objects of investment are contrary. With well-thought-out asset allocation, the return can be optimized, taking into account the individually desired level of risk.
What asset classes are there?
Asset classes (or assets) are categories according to which can classify different financial instruments. According to the economist William F. Sharpe, there must be no correlation between the returns of other asset classes. Because of this reason, it makes sense to use asset allocation to diversify risk. Because of the returns fall within one asset class, this theory does not affect other asset classes. Thus, the negative development of one asset class is at best offset by favourable growth of another asset class.
Asset Allocation Methods: Weighting The Portfolio
There are no general guidelines for optimal asset allocation. However, there are numerous methods for determining tailored asset allocation.
The classic: Portfolio Theory According to Markowitz
Asset allocation methods are mostly based on the portfolio theory of Harry M. Markowitz. The Markowitz paradigm is named after the US economist, the classic procedure for optimizing asset allocation in three steps:
- Definition of total return: Based on personal investment goals and the individual investment strategy, the amount of recovery that is to be generated by the end of the planned investment period is determined.
- Historical analysis: The performance of various asset classes in the past is analyzed.
- Asset Allocation: Based on the data obtained through the analysis, and the previously defined return target, the money to be invested is allocated to different asset classes. The overall risk of capital investments is automatically as high as it has to be at a maximum to achieve the long-term goal. Thus, no unnecessarily high risks are taken.
Asset Allocation Tools
Several software programs can be used to analyze and construct a portfolio. In doing so, these tools often use the paradigm formulated by Markowitz and fall back on available data on the past performance of different asset classes. Based on this analysis, they give tips for structuring a personal portfolio. Such tools are helpful in any case, especially since the second step of Markowitz’s portfolio theory can be quite labour-intensive and tedious. However, such a tool should only be used to support the implementation of the previously individually defined investment goals. There is an immense selection of programs that can help optimize the asset allocation of your portfolio. The search for the right software is based on individual needs.
Strategic or Tactical Asset Allocation?
The long-term definition and readjustment of a capital weighting described so far is called strategic asset allocation. Most of the time, this is what is meant when asset allocation is mentioned. In theory, however, a distinction is made between strategic and tactical asset allocation.
Tactical asset allocation is a temporary overweighting or underweighting of individual asset classes within a strategically oriented portfolio, in order to benefit from favourable market developments in the short term and increase overall returns.
For example, if the stock market is in a bull market, would temporarily increase a phase of rising stock exchange prices, the share of securities as a part of tactical asset allocation. If the high on the stock market weakens again, would undertake a return to strategic asset allocation.
The tactical asset allocation gives the investor flexibility that is not available with rigid strategic asset allocation. In this way, it can also optimize the return.