Types of Asset Allocation
There are three primary categories of asset allocation, distinguished by their strategic approach to investing: strategic, tactical, and core-satellite.
Main Categories
- Strategic Asset Allocation — a long-term approach to investing that involves allocating assets based on an investor's risk tolerance and investment objectives, as seen in the Vanguard 500 Index Fund, which tracks the S&P 500 index and provides broad diversification.
- Tactical Asset Allocation — a short-term approach to investing that involves actively adjusting asset allocations in response to changing market conditions, as exemplified by Goldman Sachs Asset Management, which uses a combination of quantitative models and fundamental research to make tactical investment decisions.
- Core-Satellite Asset Allocation — a hybrid approach to investing that combines a core portfolio of long-term holdings with a satellite portfolio of shorter-term, tactical investments, as illustrated by the BlackRock Core-Satellite Portfolio, which allocates 60% to a core portfolio of index funds and 40% to a satellite portfolio of actively managed funds.
Comparison Table
| Category | Investment Horizon | Risk Level | Management Style |
|---|---|---|---|
| Strategic Asset Allocation | Long-term (5+ years) | Medium | Passive |
| Tactical Asset Allocation | Short-term (less than 1 year) | High | Active |
| Core-Satellite Asset Allocation | Medium-term (1-5 years) | Medium-High | Hybrid |
How They Relate
The categories of asset allocation often overlap or are commonly confused, particularly between Strategic Asset Allocation and Core-Satellite Asset Allocation, as both involve a long-term approach to investing. However, Strategic Asset Allocation is a more rigid approach, whereas Core-Satellite Asset Allocation allows for more flexibility in responding to changing market conditions. Tactical Asset Allocation, on the other hand, is often used in conjunction with Strategic Asset Allocation, as investors may use tactical allocation to adjust their portfolios in response to short-term market fluctuations while maintaining a long-term strategic approach. For example, an investor using Strategic Asset Allocation may also employ Tactical Asset Allocation to temporarily shift assets from stocks to bonds during a market downturn. Additionally, Core-Satellite Asset Allocation can be used to combine the benefits of Strategic Asset Allocation and Tactical Asset Allocation, by allocating a core portfolio to a long-term strategic approach and a satellite portfolio to a shorter-term tactical approach.