Advocates of traditional approaches to asset allocation will tell you it’s a time-tested strategy for reducing the impact of market volatility on your portfolio. Critics will tell you times have changed. While both statements are true, the principle behind this strategy remains sound and the way in which savvy investors approach portfolio construction is evolving.

The basic idea behind asset allocation is essentially to not put all of your eggs in the same or similar baskets. Investing in different asset classes with different behavioral characteristics is intended to minimize the impact of underperformance in a specific asset class or volatility across asset classes. However, increased interconnectivity between traditional investment markets has, under certain conditions, diminished the beneficial effects of such diversification.

But rather than abandoning the concept, broadening your investment universe to include options designed to capitalize on market opportunities, avoid major pitfalls or reduce volatility can lead to a more active asset allocation plan that is flexible enough to weather periods of protracted volatility and nimble enough to adapt to today’s often rapidly changing market conditions.

Following is a basic framework, broken down by recommended weighting, for a dynamic asset allocation within an investment portfolio:

Traditional asset allocation: 60–100%
The foundation and majority of your asset allocation plan should reflect your risk tolerance and required return. This should include stock investments that vary in size, style and geographic concentration as well as both corporate and municipal bonds. To compensate for increased correlation between these asset classes, you can incorporate satellite asset classes (defined as high-yield bonds, real estate, commodities and emerging markets).

Alternative assets: 0–20%
Non-traditional or “alternative” investments generally carry a higher expected risk/return trade-off and can provide additional opportunities for diversification. The major benefit of many alternative investments is lower correlation with other, more traditional asset classes. Correlation is the degree to which two investments perform similarly, and lower correlation can lead to lower overall portfolio volatility in times of uncertainty. Common alternative investments include niche asset classes and absolute return strategies, but options may expand to include hedge fund and private equity allocations for qualified clients. Many alternative investments have unique characteristics that make them unsuitable for most investors.

Flexible strategies: 0–20%
Even during periods of uneven market returns and an uncertain outlook, opportunities can arise. Capitalizing on them requires recognition of shorter-term trends, which can oscillate between investment types. Under these circumstances, maintaining a flexible approach with a portion of your assets could be advantageous. Broad mandate investment strategies are not constrained by a specific classification and can invest nearly anywhere. Similarly, tactical managers can invest anywhere but typically focus their investments within more specific niches. Either approach can be nimble enough to adapt and take advantage of short- to medium-term trends. It is important to note, however, that trying to time the market is incredibly difficult. Some additional risk also exists because such strategies rely more on the judgment of an investment manager than the inherent qualities of an asset class. These options may not be suitable for all client types.

Obviously you should consider your investment goals, risk tolerance and time horizon when making any investment decision. A financial advisor who understands your unique situation can be an invaluable partner in the process of building a portfolio with a dynamic asset allocation designed to meet your needs.