Dynamic Allocation Indices
- Portfolio strategies that change asset weights in response to market conditions rather than keeping a fixed allocation.
- Can shift toward defensive assets (e.g., bonds, cash) in uncertainty or toward growth assets (e.g., stocks, real estate) in strength.
- More flexible than traditional fixed-allocation index funds and can be used to manage risk and seek upside.
Definition
Section titled “Definition”Dynamic allocation indices are investment strategies that adjust the allocation of assets within a portfolio in response to changes in market conditions.
Explanation
Section titled “Explanation”Dynamic allocation indices alter the portfolio mix based on assessed market conditions. They may use analytical approaches to decide when to change allocations and can move toward defensive assets such as bonds and cash during market uncertainty, or toward growth-oriented assets such as stocks and real estate during market strength. Some funds implementing dynamic allocation also apply periodic rebalancing to maintain target allocations. Compared with traditional index funds that often have a fixed allocation, dynamic allocation indices provide a more adaptable approach to investing, aiming to manage risk and capture market opportunities.
Examples
Section titled “Examples”BlackRock Global Allocation Fund
Section titled “BlackRock Global Allocation Fund”This fund uses a combination of fundamental and technical analysis to assess market conditions and make adjustments to the allocation of assets within the portfolio. The fund may shift its allocation towards more defensive assets, such as bonds and cash, during times of market uncertainty, and towards more growth-oriented assets, such as stocks and real estate, during times of market strength.
Vanguard Balanced Index Fund
Section titled “Vanguard Balanced Index Fund”This fund uses a strategic mix of stocks and bonds to provide investors with a balanced approach to investing. The fund periodically rebalances its allocation to maintain a target ratio of stocks to bonds, depending on market conditions and the fund’s investment objective. For example, if the stock market is performing well and the fund’s allocation to stocks has increased above its target ratio, the fund may sell some of its stock holdings and use the proceeds to buy more bonds, in order to maintain its desired balance.
Related terms
Section titled “Related terms”- Index fund
- Traditional index funds
- Rebalancing
- Fundamental analysis
- Technical analysis
- Defensive assets (e.g., bonds, cash)
- Growth assets (e.g., stocks, real estate)