Dynamic Asset Allocation Strategy of Portfolio ManagementNobleTrading
November 17, 2008 — 1,744 views
Different persons have different portfolio management needs, some want to maximize the return, some want to minimize risks with steady investment growth, some want constant earnings, and some others want to earn more spending least time. Dynamic asset allocation is one such portfolio management strategy which aims at maximizing the portfolio return by active management of portfolio components.
Dynamic asset allocation is one of the most active portfolio management strategies which involve frequent/constant and quick adjustments of investments inline with the performance of investments over time and with the market trends. Because of this active management dynamic asset allocation is considered as a risky strategy and is not at all advocated for persons with less investment knowledge, low capital and who have not time to monitor their investments.
Unlike two other popular portfolio management strategies, strategic and tactical asset allocations strategies, dynamic asset allocation does not involve keeping a fixed investment ratio. Dynamic investors diversify their investments by investing in equities, mutual funds, index funds, currencies, derivatives and fixed income securities. They buy instruments which are rising (or are predicted to rise) and they sell instruments which are falling (or are predicted to fall). Although not common, many dynamic investors keep a reasonable proportion between high-return/high-risk instruments such as stocks and low-return/low-risk instruments such as treasury bonds.
Evaluation of current trends and prediction of future trends on investments are very important with dynamic asset allocation. Investors can use a range of technical and fundamental analysis tools for this purpose. Successful dynamic investors are those who make right buy and sell decisions at right time.
Advantages of dynamic asset allocation strategy involve
1. Better return compared to other strategies. 2. Better exploitation of opportunities as more investments are done in rising products. 3. Low downside risk by avoiding declining products. 4. Portfolio adjustment with changing local and global economic situations. 5. Benefits from diversification of portfolio.
Disadvantages of dynamic asset allocation strategy involve
1. Need of active portfolio management, demanding money, time and tools. 2. Increased chance of loss due to poor market interpretation and wrong decisions. 3. Increased risk compared to other strategies. 4. Many times keeping the right asset allocation ratio and risk level is very difficult.
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