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Strategic Asset Allocation: Definition, Examples, and Benefits

By
James Chen
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James Chen, CMT is an expert trader, investment adviser, and global market strategist.
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Updated October 26, 2025
Reviewed by
Cierra Murry
Cierra Murry
Reviewed by Cierra Murry
Full Bio
Cierra Murry is an expert in banking, credit cards, investing, loans, mortgages, and real estate. She is a banking consultant, loan signing agent, and arbitrator with more than 15 years of experience in financial analysis, underwriting, loan documentation, loan review, banking compliance, and credit risk management.
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What Is Strategic Asset Allocation?

Strategic asset allocation is a long-term investment strategy in which an investor sets target allocations across asset classes based on factors like risk tolerance and financial goals. The portfolio is rebalanced periodically to maintain these targets as asset values shift.

Unlike tactical allocation, which reacts to short-term market trends, strategic allocation aligns with a buy-and-hold approach; for example, an investor, like Mrs. Smith, may rebalance her portfolio annually to preserve her original asset mix.

Key Takeaways:

  • Strategic asset allocation involves setting and periodically rebalancing target allocations for different asset classes to maintain a desired risk-return balance.
  • Target allocations depend on factors like risk tolerance, time horizon, and investment objectives, and may change over time.
  • This strategy aligns with a buy-and-hold approach, differing from tactical asset allocation, which suits active trading.
  • An example involves rebalancing a $500,000 portfolio with predetermined allocations in equities, fixed income, and cash.
  • Periodic rebalancing helps achieve long-term investment goals by maintaining the original or adjusted asset allocation strategy.
A team of people gather around a desk covered with financial documents showing the allocation of assets by asset classes.
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How Strategic Asset Allocation Works

In strategic asset allocation, the target allocations depend on several factors: the investor’s risk tolerance, time horizon, and investment objectives. Also, the allocations may change over time as the parameters change. Strategic asset allocation is compatible with a buy-and-hold strategy as opposed to tactical asset allocation, which is more suited to an active trading approach. Strategic and tactical asset allocation styles are based on modern portfolio theory, which emphasizes diversification to reduce risk and improve portfolio returns.

Real-World Example of Strategic Asset Allocation

Suppose 60-year-old Mrs. Smith, who has a conservative approach to investing and is five years away from retirement, has a strategic asset allocation of 40% equities / 40% fixed income / 20% cash. Assume Mrs. Smith has a $500,000 portfolio and rebalances her portfolio annually. The dollar amounts allocated to the various asset classes at the time of setting the target allocations would be equities $200,000, fixed income $200,000, and cash $100,000.

In one year’s time, suppose the equity component of the portfolio has generated total returns of 10% while fixed income has returned 5% and cash 2%. The portfolio composition is now equities $220,000, fixed income $210,000, and cash $102,000.

The portfolio value is now $532,000, which means the overall return on the portfolio over the past year was 6.4%. The portfolio composition is now equities 41.3%, fixed income 39.5%, and cash 19.2%.

Based on the original allocations, the portfolio value of $532,000 should be allocated as follows: equities $212,800, fixed income $212,800, and cash $106,400. The table below shows the adjustments that must be made to each asset class to get back to the original or target allocations.

Asset Class Target Allocation Target Amount (A) Current Amount (B) Adjustment (A) - (B)
Equities 40% $212,800 $220,000 ($7,200)
Fixed Income 40% $212,800 $210,000 $2,800
Cash 20% $106,400 $102,000 $4,400
Total 100% $532,000 $532,000 $0

Thus, $7,200 from the equity component has to be sold to bring the equity allocation back to 40%, with the proceeds used to buy $2,800 of fixed income, and the balance of $4,400 allocated to cash.

Note that while changes to target allocations can be carried out at any time, they are done relatively infrequently. In this case, Mrs. Smith may change her allocation in five years, when she is on the verge of retirement, to 20% equities, 60% fixed income, and 20% cash to reduce her portfolio risk. Depending on the portfolio value at that time, this would necessitate significant changes in the composition of the portfolio to achieve the new target allocations.

The Bottom Line

Strategic asset allocation focuses on setting long-term target allocations across asset classes and rebalancing periodically to maintain them. Factors like risk tolerance, time horizon, and investment goals shape these targets.

For example, an investor might rebalance their portfolio annually to preserve their desired mix. Unlike tactical allocation, which involves active adjustments based on market trends, strategic allocation supports a steady, buy-and-hold approach.

Investopedia does not provide investment advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor, and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.

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Take the Next Step to Invest
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.