The long-term target weights a portfolio is built around, chosen from horizon and risk tolerance rather than from a view on the next quarter.
Strategic allocation sets the baseline: for example 60% global equities, 30% bonds, 10% real assets. It is written down, reviewed rarely, and treated as the default state of the portfolio. Everything else is a deviation from it that has to be justified.
The discipline of a written policy is the point. Without a target there is nothing to rebalance back to, so a portfolio simply drifts toward whatever went up last (see portfolio-drift). With a target, a 10-point gain in equity weight becomes a sell signal rather than a reason to feel clever.
Example: a $500,000 portfolio with a 60/40 policy holds $300,000 equities. After a strong year equities are worth $360,000 and bonds $190,000, so the equity weight is 65.5%. The policy says sell about $30,000 of equities to return to target.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Risk and reward on one trade. One trade on a price scale: the entry sits 2.00 points above the stop and 6.00 points below the target, so the shaded reward band is three times the risk band. The ratio compares what is lost if the stop is hit with what is gained if the target is reached.
Educational only, not advice. Spotted an error? Post in Site Feedback.