Fixed Allocation

Back to Index

What does fixed allocation mean?

Fixed allocation is a very passive strategy for investing which is designed for long term investors.

Once a fixed-allocation portfolio is set up, it is only evaluated periodically.

Instead of being managed by a dedicated investment manager or team who can make small tweaks whenever required, a fixed-allocation portfolio is left.

How do fixed-allocation portfolios work?

  • When you start your fixed-allocation portfolio, the mix of the assets you invest in is based on your preferences including risk tolerance and your financial goals.
  • The company you are investing with will usually identify exchange-traded funds (ETFs) or mutual funds that fit these preferences, and your portfolio will include several for each asset class you want to invest in.
  • The idea behind this kind of investing is essentially that over the long term your returns are purely driven by the original asset allocation being correct for your time frame. The belief of this method is that, trying to time the markets to make shorter-term tactical moves don’t add more value than they cost in trading fees in the long run.

Advantages of a fixed-allocation portfolio

  • The major benefit is cost-based. Because a company’s investors are not responsible for actively managing your investments, the management fees can be far lower.
  • Fixed-allocation portfolios are far less time-consuming to manage.
  • As predetermined ETFs are used, the risk is often low.

Disadvantages of a fixed-allocation portfolio

  • The lack of a dedicated investment team that can adjust your investments when needed means your potential returns may suffer, particularly during downturns.
  • Not appropriate for shorter-term investors.
  • Lack of adjustments means that the initial asset allocation has to be correct for the relevant time frame and risk appetite.