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Explain why diversification is important when creating a strategic asset allocation but not as important when...

Explain why diversification is important when creating a strategic asset allocation but not as important when creating a tactical asset allocation?

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Answer #1

Strategic Asset Allocation is a long term concept. It is created to meet the long term goal. Say an individual wants to have $500M after 30 years, so strategic Asset Allocation will choose the best assets and see the diversification benefit to reach the goal.

Tactical asset allocation is short term, say that in next 1 year the gold price will increase. so to take advantage of the situation, tactically money will be allocated and after it is over, then again weights will be assigned as per Strategic Asset allocation. So Tactical is to take advantage of short term opportunities. Diversification has long term benefits. So in short term if the portfolio is not so diversified, then it will not hurt much

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