Q – My investment advisor has recommended a “strategic asset allocation” fund for my mutual fund portfolio. In doing my own research on the subject, I have been reading about something called “tactical asset allocation.” In your opinion, which strategy is better for generating higher investment returns? – Harold T., Halifax, Nova Scotia
A – Strategic asset allocation involves periodically shifting assets within a portfolio to hold to predefined objectives. For example, if you are a balanced/aggressive investor you may have an equity-to-fixed-income ratio of 65% to 35%. If the equity portion of your portfolio increases to 75% as a result of rising equity markets or strong performance by your equity mutual fund, under a strategic asset allocation policy, the equity portion of your portfolio will need to be rebalanced back to 65% to be in line with your original investment objectives. Your advisor may recommend you to sell the excess 10% equity and purchase 10% on the fixed-income side.
Tactical asset allocation, however, is an active portfolio management strategy that aims to take advantage of short-term movements in the markets. In the case of a mutual fund, for example, the manager will allocate assets in different sectors in an attempt to provide short-term profits and then return to the portfolio’s strategic asset allocation. Using the same example, if the manager felt the markets were on the rebound, she may consider investing 100% in equities and underweight the fixed-income allocation for a short time.
If the manager felt the markets were going to fall or correct, she could move to 100% cash. The risk is that the manager makes the wrong call. If the market falls, and the fund is 100% allocated to equity, you will most certainly feel the pinch. On the other hand, if the market rallies as per the fund manager’s call, you could reap the benefit.
This is a question of risk. There is no free lunch. If you want higher returns, then you will need to accept more risk. Review your risk tolerance level with your advisor – they’re trained to help you determine the risk level you really can tolerate versus what you think you can tolerate. Then, if you feel that you are in a position to take on additional risk, ask your advisor to recommend some tactical allocation funds. – R.T.