Strategic Asset Allocation (SAA) – 7 plus years

FOX Wealth Management

Modern portfolio theory (Harry Markowitz, 1952) provides the platform for designing a portfolio construction framework for Investors looking for a structured approach to investment risk. Markowitz believes that diversification of securities across uncorrelated asset classes, is an essential ingredient to spread the investment risk of a portfolio and derive returns from various sources thus, limiting the impact of the volatility experienced when external shocks involving political, social, or economic issues, such as the Global Financial Crisis (GFC), impact the expected returns of an investor’s portfolio. The followers of this theory (yes still valid after 60 years) believe that this approach is consistent with the investment horizon of a longer-term investor (typically seen as at least 7 years) that is not too troubled by the short to medium term impacts that external shocks, such as the GFC, may have on their portfolio valuation and return outcomes. SAA guidelines tend to be followed by both Wealth Accumulators and Retirees who, in most cases, have the benefit of longer time frames for the volatility and valuations of their exposures to smooth out and hopefully, revert over time to more normal levels, before having to rely on their investment assets for capital or income needs. (Bearing in mind historical performance is no guide for future performance.) Events like the GFC panicked investors as the diversification mantra in unruly and volatile markets did not work as effectively as planned with investors seeking the safety of defensive assets, such as cash and term deposits, rather than stick with their exposures to Growth assets (seen as risky assets due to their highly visible, large daily fluctuations in prices.) The SAA approach tends to rely more heavily on growth assets (typically cyclical, inflation based) to achieve long term asset appreciation coupled with consistent income from bond like structures. For example, a typical Growth / Defensive SAA structure may look like the following:

  • Low Risk Taker: 80% Income Assets (defensive) and 20% Growth Assets; and.
  • High Risk Taker: 20% Income Assets (defensive) and 80% Growth Assets.