When forming a portfolio, an investor should determine in what proportions to include assets of various classes, for example, stocks of large companies, stocks of small companies, short-term bonds, long-term bonds, foreign stocks, foreign bonds, etc. This decision is called an asset class allocation decision and can be strategic or tactical. Strategic decisions are based on long-term expectations of the investor in relation to risk and return (time interval up to 10 years), and tactical decisions are based on short-term expectations (time interval can be up to one year or less).

Today, within the framework of active strategies for managing a portfolio of securities, it is customary to distinguish mechanical strategies - this is a set of methods for managing a portfolio, which are based on following certain rules. Let's look at some examples of mechanical strategies.

The constant proportion strategy: involves investing in certain asset classes in a certain proportion and maintaining this ratio throughout the entire period of portfolio management. Market changes in asset prices will violate the established proportion; to restore it, the portfolio should be periodically restructured.

The floating range strategy - is a kind of constant proportion strategy, its essence is as follows: the ratio is chosen in which the asset classes are included in the initial portfolio. For example, the shares in the portfolio will be distributed in the ratio: 60% of stocks and 40% of bonds. The portfolio needs to be revised only if the proportion of stocks in it exceeds 70% or falls below 50%.

The floating ratio strategy - is similar to the floating range strategy, the main difference is that when the portfolio revision limits are reached, the shares of securities return not to the original ratio, but to the upper or lower values ​​of the new ratio.

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The portfolio insurance strategy: the investor sets the minimum acceptable level of the portfolio value, when the situation changes, the portfolio value changes and, accordingly, the number of stocks in the portfolio is revised.

Well, dividing portfolio strategies into two types is not exhaustive. New techniques appear every year, which include both active and passive elements. Passive strategies can be used to manage the key assets in the portfolio, while active strategies can be used for the remainder.

By Andrew Mitchell