Asset Allocation
high confidence — compiled with source citation from the investment brain.
Asset Allocation
Asset Allocation
Asset allocation is the decision of how much of a portfolio to place in each asset class — equities, bonds, cash, and alternatives — before any individual security is chosen. The CFA curriculum treats it as the first, and in many respects the most consequential, step in implementing an investment strategy.
The anchor is the strategic allocation. It is "the baseline allocation of portfolio assets to asset classes in view of the investor's investment objectives and the investor's policy with respect to rebalancing asset class weights", also known as the policy portfolio. A strategic asset allocation is not picked freely: it "results from combining the constraints and objectives articulated in the IPS and capital market expectations regarding the asset classes", and its risk–return profile depends on the expected returns and risks of each class and the correlations between them — adding asset classes with low correlation to each other improves the risk–return trade-off.
Against this baseline sits tactical allocation: "the decision to deliberately deviate from the policy exposures to systematic risk factors (i.e., the policy weights of asset classes) with the intent to add value based on forecasts of the near-term returns of those asset classes." The curriculum places both inside risk budgeting — deciding the total risk to assume and subdividing it across its three sources: strategic allocation, tactical allocation, and security selection. Strategic allocation is rewarded with a long-run payoff to risk; security selection is a zero-sum game in which "the average active investor will match the market return" gross, and underperform net of costs — a point shared with the efficient-market-hypothesis.
Ray Dalio reaches a similar structure from the opposite direction — not optimization, but survival. His premise is that no single asset class is safe across regimes: "Every major asset class had great and terrible decades, so much so that any investor who had most of their wealth concentrated in any one investment would have lost almost all of it at one time or another." The response is to hold a balanced portfolio rather than to time the turns: the investor either successfully times the ins and outs, or "faded the moves (i.e., bought more when prices fell and sold more when prices rose), or had a balanced portfolio that would have held relatively steady through the moves. The worst thing would have been to go with the moves." Dalio generalizes the same idea as a counting problem, calling it the Holy Grail of Investing: finding and making 15 or more great uncorrelated bets, and the compact version, "Don't bet too much on anything. Make 15 or more good, uncorrelated bets."
The two frames meet at correlation. The CFA's allocation improves by adding low-correlation asset classes; Dalio's by spreading across uncorrelated return streams. Where they differ is temperament: the curriculum optimizes a risk–return frontier given expectations, while Dalio treats expectations as unreliable and builds the portfolio so that no single forecast has to be right. Fund-management documents in the corpus state the defensive version plainly — capital preservation is treated as a higher priority, leading to more diversification and volatility-reducing strategies.
The strategic/tactical split is where allocation connects to the rest of the corpus. The tactical deviation from policy is, in effect, a cycles bet — a judgment about the near-term direction of a market. The strategic baseline is the durable decision, and it is maintained through rebalancing-discipline, which restores drifted weights to policy. See rebalancing-discipline and risk-parity.
See also
Sources
textbooks/markdown/investment-textbooks-pdfs__CFA LV1 2025 - Volume 09 - Portfolio Management.mdinvestor-letters/DalioBridgewater/Letters-Markdown/Paradigm Shifts (2020).mdinvestor-letters/DalioBridgewater/Letters-Markdown/How Countries Go Broke - The Big Cycle.mdinvestor-letters/DalioBridgewater/Letters-Markdown/Principles (2011).mdtextbooks/markdown/fund-mgmt-pdfs__Forming and Operating Hedge Fund.md