Coverstory: Strategic vs. Tactical Asset Allocation
Strategic versus Tactical has been a debate in the investment management industry for some time. Its death was announced by the financial media with the 2008 market meltdown when diversified portfolios did not somehow mysteriously avoid the down turn.
BY DAVID COHNE | COHNE INVESTMENT GROUP LLC | BOSTON (MA)
Strategic asset allocation is defined as an investment strategy that employs periodic rebalancing of your portfolio (which could be allocated to equities, commodities, bonds etc.) so that it remains on target for your long term asset allocation goal. The long term asset allocation is determined by an investment advisor or portfolio manager based on your risk levels and performance needs. The manager will typically analyze expected returns and risks of an asset to determine its role in a portfolio. As the market moves, this asset allocation may be slightly changed. In addition, the managers will likely rebalance a portfolio at set times. As some asset classes will perform better than others, this is done to bring the portfolio back to the set target allocations. This can be done with trades or at the end of a quarter or year. While strategic asset allocation is by no means a passive strategy, it is not considered a very active strategy as changes are mostly made infrequently.
Tactical Asset Allocation
Tactical asset allocation on the other hand is defined as an active strategy. It entails rebalancing your portfolio so that it takes advantage of price trends, strong market sectors or price anomalies. These changes are more frequent than strategic asset allocation. Sometimes they can be made each month or even each week. I have mentioned tactical strategies in the past, but to review, the most utilized strategies entail looking for undervalued assets, finding assets in up trends based on momentum, looking at sentiment measures or economic trends.
In simple terms, strategic asset Allocation can be looked at by keeping a fixed asset allocation while tactical asset allocation does not follow a fixed asset allocation. To analyze the differences of the two I want to look at the benefits and drawbacks of each. Strategic asset allocation is typically more appropriate for investors looking to maintain a set asset allocation that is followed continuously. Tactical asset allocation is more suitable for more active investors that like to see changes made more frequently based on the conditions of the market. Strategic investors are looking for an optimal balance of risk and return over the long term. It is a much easier strategy to implement once the target allocations have been set. Tactical investors are less buy and hold and believe they can beat the market by choosing different asset categories at the right time. Strategic asset allocation may be more appropriate for conservative investors ready for retirement while tactical strategies are more appropriate for younger and more aggressive investors. Tactical strategies can better help protect the portfolio while strategic strategies typically don’t have a trading strategy to protect the portfolio. In terms of risk, a tactical strategy may pose more risk depending on how often the portfolio trades and who is managing the portfolio. This makes strategic asset allocation a likely better strategy for investors who don’t like volatility or are risk averse. On other hand, a tactical investing strategy may the
Tactical strategies can better help protect the portfolio while strategic strategies typically don’t have a trading strategy to protect the portfolio. In terms of risk, a tactical strategy may pose more risk depending on how often the portfolio trades and who is managing the portfolio. This makes strategic asset allocation a likely better strategy for investors who don’t like volatility or are risk averse. On other hand, a tactical investing strategy may the
At Cohne Investment Group our mutual fund portfolios are managed using a proprietary strategic asset allocation strategy with a tactical overlay, meaning that we employ market timing when our indicators tell us to get out of the market. We employ tactical asset allocation with our ETF portfolios. As active ETFs haven’t really grown yet, we rely on macro factors with index based ETFs. We have developed a proprietary way of managing these portfolios based on different risk levels meaning that we employ a very conservative tactical strategy for very conservative investors. Our stock portfolios also employ a tactical strategy in addition to our fundamental research.
Whether you choose a strategic or tactical strategy, it is very important to stick with that strategy. Most investors fail when they constantly change their strategy or abandon it when it doesn’t work. You may also find that you would like to employ both. Actually, we find that both strategies can compliment one another. You can have a set amount of your total portfolio follow a strategic asset allocation and another amount targeted for a tactical strategy. Another strategy is to start with a base strategic asset allocation and then employ slight tactical asset allocation of those assets when deemed necessary. The choice is yours. ◄