Dynamic Asset Allocation


DEFINITION of 'Dynamic Asset Allocation'

A portfolio management strategy that involves rebalancing a portfolio so as to bring the asset mix back to its long-term target. Such rebalancing would generally involve reducing positions in the best-performing asset class, while adding to positions in underperforming assets. The general premise of dynamic asset allocation is to reduce the fluctuation risks and achieve returns that exceed the target benchmark.

BREAKING DOWN 'Dynamic Asset Allocation'

For example, an investor with a $100,000 portfolio may want to hold 50% each of stocks and bonds. After a couple of years, when stocks have outperformed bonds, the portfolio now holds $65,000 in stocks and $55,000 in bonds. Assuming the investor wishes to retain the original 50:50 asset mix, dynamic asset allocation would result in the sale of $5,000 worth of stocks from the portfolio, and the proceeds would be used to buy bonds.

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