Asset Allocation is the investment strategy of allocating your financial resources among asset classes such as cash, fixed income and equities.

Strategic asset allocation means that you structure your portfolio to meet your desired risk and return by allocating your financial resources among the different asset classes in a set proportion. For example, you may decide to go with 10% cash, 20% fixed income and 70% equities. You would then stick with this asset allocation throughout the various market cycles.

Tactical asset allocation involves adjusting your asset mix based on how you feel the different asset classes will be performing in the future. So, if you expect equities to take off, you may slant the above portfolio to 5% cash, 10% fixed income and 85% equities. Then, if you think that equities will be starting to slide, you may shift to 15% cash, 20% fixed income, and 65% equities.

Personally, I am a strategic investor. Unfortunately, my crystal ball is a little hazy, so why dabble in market timing (which is what tactical investing is all about). Of course, if I did the opposite of what I thought would happen, I would probably be right most of the time!

Supposedly, asset allocation accounts for 85% of a portfolio’s return. It is obviously a very important (first) step when designing your portfolio.

So, review your asset allocation and make sure it is right for you and stick with it.