Active asset allocation


Active asset allocation is a method of managing portfolios. This method is commonly contrasted against buy-and-hold investing in which an asset allocation is held for the long-term regardless of changes in the economy or various financial markets. Active allocation changes where money is allocated based on current data. At different times there may be more or less allocated to large cap US stocks versus foreign stocks for example.

In active management the asset class weightings (cash, bonds, commodities, large cap equities, small cap equities, international equities, industry sector weightings, etc.) vary based on determinations of the current and future relative risk and reward characteristics of the asset classes. Some method of tracking measures of relative risk and reward of asset classes feeds into decisions on how much of each asset class, if any, should be held currently. Economic data and forecasts, asset class valuations and momentum compared to similar periods in the past and other factors are commonly used to determine allocations.

When properly implemented, active management strategies should lessen an investor's exposure to declining markets, blunting the impact of bear markets and preserving capital and the majority of prior gains. Moving out of the market prior to, or early during a decline means there is more money to invest when the market heads upward. Active asset allocation is most effective over a full market cycle (3 to 5 years).

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