Strategic Asset Allocation (SAA)
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What is Strategic Asset Allocation (SAA)?
Strategic asset allocation refers to a long-term portfolio strategy that involves choosing asset class allocations and rebalancing the allocations periodically. Rebalancing occurs when the asset allocation weights materially deviate from the strategic asset allocation weights due to unrealized gains/losses in each asset class.
An SAA strategy is used to diversify a portfolio and generate the highest rate of return at a given level of risk. It is similar to a buy-and-hold strategy in that target asset weights are chosen and maintained over a long period of time. Target allocations in the SAA strategy depend on several factors, including investor risk tolerance, time horizon, and return objectives.
Quick Summary:
A strategic asset allocation strategy involves choosing asset class allocations and rebalancing periodically to match the asset class allocations.
Factors that affect strategic asset allocation weights include risk tolerance, time horizon, and return objectives.
The SAA method follows a contrarian approach to investing.
Example of Strategic Asset Allocation
Jeff, in his investment policy statement, indicated that he wants a strategic asset allocation of 50% stocks / 40% bonds / 10% cash. Jeff’s portfolio is valued at $1 million, and he rebalances annually. At the beginning of the year, his portfolio looks as follows:
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