A more passive method of asset management than tactical asset allocation, this strategy involves periodically rebalancing a portfolio in order to maintain a long-term goal. Though other opportunities may arise, the portfolio manager employing this methodology will not deviate from the original asset mix, although the underlying investments may change as needed.

For example, if a client’s goals dictated a certain percentage of assets be invested between small cap, large cap, international, large cap, and bonds with specific percentages or weightings given to each category, this mix will not be deviate from unless the original goal that dictated the specific allocation weightings has changed.

Assume 30% of the client’s portfolio was to be invested into Large Cap stocks or mutual funds.* That weighting (30%) is fixed, however the individual stocks and funds comprising that 30% may be replaced with other large cap holdings as needed. The category (Large Cap), however, remains unaltered.

The reasoning behind this discipline is that a goal was set in the beginning with analysis done showing how to best meet that goal. So long as the analysis is continually believed to be accurate (and the original goal is still in tact), the original portfolio created is valid and need not be altered. As some asset categories perform better than others given certain market conditions, the portfolio is re-adjusted to keep the allocation within the original framework.

* This example is purely hypothetical and is not investment advice for any individual. Investment advice requires a deep understand of the client’s risk tolerance, time horizon, investment objectives and other factors.