For much of the past four decades, Strategic Asset Allocation (SAA) has formed the foundation of portfolio construction. The principle is simple: establish a long-term mix of equities, bonds, and alternatives based on risk tolerance, rebalance periodically, and maintain discipline. In a world of globalisation, falling inflation, and declining interest rates, that framework worked exceptionally well.
But the investment environment has fundamentally changed. Inflation is sticky, growth is slowing, and debt levels across governments and corporations are at historic highs. Geopolitical risks and policy uncertainty are now major drivers of market behaviour. The assumptions that once supported SAA are no longer reliable in a world where macroeconomic cycles are shorter, shocks are more frequent, and diversification benefits are weaker.
The Assumptions Behind SAA Are Being Tested
A Money Management editorial, 'Does Strategic Asset Allocation Make Sense?', questioned whether SAA remains fit for purpose in today’s markets. It highlighted that many of SAA’s core assumptions - such as stable correlations, predictable volatility, and mean-reverting returns - no longer hold true. Bonds no longer reliably offset equity risk, and historical averages offer less insight into future outcomes.
This view is supported by economist and fund manager John Hussman, whose July 2025 commentary 'The Impression of Invincibility' notes that U.S. equity valuations are now at or above previous historical extremes. Hussman’s model estimates that **expected 12-year annualised S&P 500 total returns are effectively near zero**, while the **equity risk premium versus Treasury yields is the lowest on record** (Hussman Funds, 2025).
In practical terms, this means the traditional assumptions underpinning SAA - long-term equity growth and reliable diversification - are unlikely to deliver the same results in the coming decade.
When forward-looking return expectations are this constrained, static portfolios anchored to long-term averages are exposed to prolonged periods of underperformance. For advisers and dealer groups, this presents serious challenges and risks: client outcomes that fall short of expectations, declining real returns, and greater difficulty maintaining client trust.
Why This Matters for Advisers and Their Clients
For advisers, the issue is not just theoretical. If the long-term outlook for traditional asset classes is weak, then portfolios based solely on static allocations may struggle to meet the return and risk objectives built into client goals. Clients who expect steady real growth and moderate volatility could instead experience lower returns and higher drawdowns, undermining confidence in their financial plans and in the advice relationship itself.
This environment increases business risk for advice practices. A strategy that relies on outdated assumptions may lead to underperformance across multiple client portfolios, creating reputational and retention challenges. In short, if markets have structurally changed, portfolio construction must evolve with them.
Dynamic Asset Allocation – A Framework for the Future
Dynamic Asset Allocation (DAA) provides a pragmatic alternative. Rather than rebalancing toward fixed target weights, DAA enables meaningful changes in portfolio positioning when macroeconomic or market conditions shift. This flexibility allows for exposure to asset classes such as real assets, commodities, precious metals, or inflation-linked strategies that may perform better under current and future conditions.
At Dynamic Asset, we combine DAA with a Goals-Based Investing framework focused on real outcomes - such as CPI-plus return targets and capital protection - rather than benchmark-relative performance. This approach gives advisers and their clients portfolios that can adapt to a rapidly changing world while maintaining alignment with long-term objectives.
Given Hussman’s findings that long-term equity returns may approach zero, flexibility is no longer optional. In our view: Dynamic Asset Allocation is likely the only viable framework capable of achieving the outcomes clients expect.
In today’s environment, DAA isn’t a stylistic choice - it’s a necessity.
Looking Ahead
As the investment industry moves through this new macroeconomic cycle, advisers and dealer groups face an important decision. Continuing with traditional SAA frameworks risks anchoring client portfolios to outdated assumptions and diminished return potential. By contrast, adopting a Dynamic Asset Allocation framework allows advisers to remain responsive to change and deliver outcomes aligned with client expectations.
When the world changes, portfolios must change too. Dynamic Asset Allocation isn’t about abandoning structure - it’s about evolving it to meet the realities of a world that refuses to stand still.
To find out about how our range of differentiated SMA portfolios and investment strategies can help your advice business manage your client portfolios, Contact Us today.
Disclaimer
This material has been prepared by Dynamic Asset Consulting Pty Limited (ABN 82 079 145 298, AFSL 502623) of Level 20, 56 Pitt Street Sydney NSW 2000. Any content provided in this Report is for general information purposes only. It is not personal advice and does not take into account the investment objectives, financial situation or needs of any person. Please seek specific advice before making a decision in relation to any investment. Before making any decision about any product you should obtain a Product Disclosure Statement (PDS) or Investment Mandate (IM) document for further information. A copy of our PDS or IM is available from your adviser or by contacting us through our website at www.dynamicasset.com.au
