Money management  |  JAN 1998

Dynamic Asset Allocation: Beyond Buy and Hold by Gary Harloff, Ph.D.

Dynamic Asset Allocation: Beyond Buy and Hold by Gary Harloff, Ph.D. Even during the strongest of bull markets, not every investment rises at the same rate. This range of performance among different investments has led to money managers developing strategies to dynamically allocate among a choice of investments. Here, a money manager explains his recent research into this subject. Individuals, professionals and institutions diversify their investments over several asset classes to seek a specific return versus risk objective. An example of a typical allocation might be 65% equities, 30% bonds and 5% money markets. Such allocations might be adjusted for investor risk tolerance and/or economic conditions, such as long-term interest rate, inflation, manufacturing capacity utilization, employment level and business cycle position. Usually, many factors are analyzed in combination to determine an asset allocation.There are at least three approaches to asset allocation: strategic, tactical and dynamic. In strategic allocation, the investor allots a fixed percentage to several asset classes for a long period. Periodically, the portfolio is adjusted to bring it back to the original allocation weights, by selling winners and buying losers. When the return from one asset class rises, another typically declines, which reduces overall return.

by Gary Harloff, Ph.D.