Strategic Asset Allocation During Uncertainty: OCIO Lessons About Resilient Asset Allocation

Asset allocation is one of the most critical aspects of the financial decision-making process. Whether you’re an individual CEO, a nonprofit organization, or an individual needing private wealth management, it is important to choose an investment advisor who understands different types of asset allocation models and how they function in different economies. 

In an uncertain economy, strategic asset allocation, sometimes referred to as resilient asset allocation, is the most responsible choice that allows for growth in a financial portfolio but with minimal overall risk.

strategic asset allocation

What Is Strategic Asset Allocation?

Before we explain why strategic asset allocation is the most resilient method of asset allocation in an uncertain economy, let’s make sure everyone is on the same page with what it is. Strategic asset allocation is a method of building a portfolio that leverages stability over risk while not completely eliminating growth opportunities from the portfolio. This method of essentially diversifying asset classes and diversifying assets within asset classes is a strategy to achieve the most well-rounded and resilient long-term portfolio.

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When building your portfolio, your OCIO will choose an asset allocation model or strategy. There are three types of asset allocation:

  • Strategic asset allocation: Which looks at both short-term and long-term forecasts
  • Dynamic asset allocation: Which is a more active method of asset allocation than strategic asset allocation that considers medium-term forecasts
  • Tactical asset allocation: Which is an aggressive method that takes advantage of short-term market growth

Of the three asset allocation models, strategic asset allocation is the best bet in times of economic uncertainty.

Why Choose A Tactical Asset Allocation

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resilient asset allocation

Why Is Resilient Asset Allocation Important

Resilient asset allocation is important because you want a portfolio that can withstand the ups and downs of an uncertain economy and that takes into account the full weight of any risks taken. Of course, everyone wants to experience financial growth with their investment portfolio. However, when building your financial portfolio in an uncertain economy, you want your portfolio to be consistent instead of swinging wildly from high growth and huge losses. 

A resilient asset allocation strategy will be impervious to the lows of an unexpectedly depressed financial event but will not be so stringent that strategic changes can’t be made to capitalize on a market opportunity when presented. Overall, Resilient asset allocation puts in enough padding by diversifying the asset classes in which you have invested and diversifying the actual asset types within them. 

By having this type of spread, you have positioned yourself to still have opportunities to grow without sacrificing the bulk of your portfolio. In an uncertain economy like the one we are experiencing now, moving to a more aggressive asset allocation strategy would be risky because the market is so volatile. 

Having your OCIO use a resilient or strategic asset allocation in these times will better position you to experience growth when the overall market stabilizes; similarly, it will position you to have funds available to capitalize on a growth opportunity when an asset class is going through a positive pricing anomaly. 

Short Term Goals vs. Long Term Goals

Before fully settling on one of the asset allocation models for your financial portfolio, your OCIO must evaluate both your short-term and long-term goals. By considering your current and future goals, your OCIO will be better equipped to determine which strategy is best suited for your portfolio. When thinking about finances and market performance, short-term and long-term goals are almost flip-flopped with what a layperson might think. 

Short-term goals are typically best suited to achieving a stable portfolio and investing in low-risk, low-penalty methods where an investor is not penalized for accessing the funds after a short time. 

This differs from long-term goals, which have more flexibility because there is a longer time period for the investment to grow. Long-term goals like retirement or financial planning for a vacation home allow for a riskier asset allocation because there is time to develop and recover from any temporary losses. Investing in a stable, low-growth position will not create the returns needed to realize the long-term goals.

How Does Uncertainty Affect Strategic Asset Allocation

The economic investment climate significantly affects investment performance because of a couple of factors: the economy dictates the values of not only currency but also the perceived and realized value of asset classes. Choosing which asset classes to invest in determines your investment portfolio’s viability, stability, and growth opportunities.

Rebalancing Based On Risk Tolerance

There are times at which your investment portfolio should be rebalanced. This is more frequently necessary in an uncertain economy because changes in the overall economy can affect how much risk you take within the various asset classes you have invested in. Rebalancing your portfolio based on risk tolerance can help to appropriately diversify your portfolio, assess that that risks are in the wheelhouse of your investment manager’s capabilities, and that you are not over-exposed to assets that have become volatile.

If your portfolio can handle taking on more risk, you might be positioned to take advantage of a surge of growth opportunities; similarly, you may be more risk-averse where risks need to be scaled back. Rebalancing based on risk tolerance positions your investments to perform in the best way possible to achieve your goals. Ultimately, your investment advisor must fully evaluate your financial portfolio to determine if rebalancing is necessary or beneficial.

strategic asset allocation + resilient asset allocation

Investment Horizon

When considering which of the three main asset allocation models is best for your financial situation, your OCIO will want to look at your investment horizon, which refers to how long you plan to keep your investment portfolio. 

If you do not plan on keeping your investments vested for a long time and will need to access them after a relatively brief investment period, your asset allocation strategy will change to a more risk-averse, stable strategy. If you can keep your investments tied up for a longer time, you’ll be able to tolerate more risk. 

Combining your investment horizon with the economic forecast will position you to choose the best investment route for your assets. Doing this will allow you to leverage growth opportunities without putting too much risk. In a volatile or uncertain economy, you may make safer, less risky investments.

Frequent Reassessments

You will need to make frequent reassessments in times of uncertainty because positions can change rapidly. What once may have been a stable asset class can change overnight. Sometimes, they can bounce back, but that is only sometimes the case. Frequently reassessing your asset allocation strategy and assessing your portfolio for risk tolerance will be vital to sustaining and growing your wealth. Overall, frequent reassessments are part of a strategic asset allocation.

Making Sure Long-Term Goals Won’t Be Affected By Short-Term Volatility

Overall, when facing uncertain times, you will want to make sure your OCIO is well-seasoned in recognizing and assessing risk and volatility which helps in positioning your investment portfolio to achieve your goals. The choices they make can affect your portfolio’s performance, and you don’t want an investment advisor making choices that leave your investments vulnerable to short-term volatility.

Need Help With Strategic Asset Allocation That You Can Trust?

Leave your investment portfolio to an investment professional who truly understands how the economy can affect strategic asset allocation so that you can maximize growth opportunities without sacrificing your wealth. Choose an OCIO that you can trust with the Atlanta Consulting Group. Schedule a call with an investment advisor today to have us evaluate your investment strategy!

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