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What is dynamic asset allocation?

29/01/2024

If you have a managed investment portfolio, do you know how that portfolio is managed?

One option is dynamic asset allocation. But what exactly is this, and what are the pros and cons? 

 

An introduction to dynamic asset allocation

A dynamic asset allocation strategy involves adjusting the weights of a portfolio to take into account the current market performance, trends and risks. The portfolio manager will decide, based on these factors, to increase the weight of assets that are performing strongly, and decrease the weight of those performing less well. 

While a strategic allocation strategy is base on a target mix of assets, this isn’t the case for dynamic asset allocation. This means that the portfolio manager has the flexibility to choose from a wide range of investment classes depending on their performance. 

 

What are the pros and cons of dynamic asset allocation?

Dynamic asset allocation is a flexible investment strategy: portfolio managers can quickly respond to any market changes. The frequency of adjustments also means that some can prevent losses from any unexpected market downturns, potentially beating the market and providing higher returns. 

However, employing this strategy requires a significant amount of time and resource. Investment managers need to be truly up-to-date with market conditions, as well as specific company news and trends. It’s a strategy that requires a professional portfolio manager – and may mean that they need to work with a team of researchers to ensure that they make the right decisions at the right time. 

With this strategy requiring regular buying and selling of assets, there are also increased transaction costs associated with dynamic asset allocation. This may result in an investor’s overall return being negatively affected. 

 

“Stable Rise Limited is not authorised or registered by the Financial Conduct Authority. The marketing materials are not intended to provide financial advice nor promote any individual financial products.”

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