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Tactical or strategic: Which allocation strategy to use?

by | Oct 10, 2016 | SELF-PUBLISHED


Optimal asset allocation hinges on your risk profile

Investors often come across the terms “tactical” and “strategic” asset allocation.” While it might sound like some sort of board game, the terms actually refer to two different types of portfolio management. And how you use them can make a big difference in whether you achieve your financial goals, or fall short.

“Asset allocation” simply refers to the way you weight the assets in your portfolio to meet your investment objectives within your defined risk tolerance level.

Using “strategic asset allocation,” you would shift assets within your portfolio to hold to predefined objectives. For example, with a portfolio oriented more to growth type of investing, you might have your assets divided in a ratio of 65% equity to 35% fixed income.

But if the equity portion of your portfolio (including equity mutual funds and exchange-traded funds) increases to 75% as a result of rising equity markets as we’ve seen in the past year or two, 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 an additional 10% on the fixed-income side. That’s what’s termed a “strategic asset allocation policy.”

“Tactical asset allocation,” however, takes a more active portfolio management approach. The portfolio manager will attempt to capitalize on shorter-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 based on the manager’s investment outlook for different sectors.

Using the same example, a tactical manager may consider shifting to 90% equity exposure and underweighting fixed-income for a short time if their research indicated markets were verging on a rebound from a lengthy bearish period. Conversely if the manager felt the markets were going to fall or correct, they could move to a heavier weighting in cash and fixed-income allocations.

The risk with a tactical allocation strategy is that the manager’s call on the direction of the markets is too early or too late. For example, if the portfolio is 100% allocated to equity on the belief that a bull phase has further to run, but the market suddenly drops, you will most certainly feel the pinch. On the other hand, if the market continues to rally per the manager’s call, you could reap the benefit.

This is a question of risk. For higher returns, you will need to accept more risk, typically associated with investment funds and portfolios using a tactical allocation strategy. If you’re unclear about which method you’d feel more comfortable with, review your risk tolerance level with your financial planner. A professionally-trained Certified Financial Planner can 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.

© 2016 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice.

© 2023 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice.

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