Tactical Asset Allocation: Everything You Need to Know

Whether you are still building out your investment plan or are actively engaged in its performance, knowing the types of strategies and styles to choose from is important. Everyone’s plan may appear slightly different since we all have different goals, interests, etc. for our future.
 
If your end goal is to keep your risk at a minimum while maximizing your future profit, then learning more about tactical asset allocation may benefit you. Let’s read on to learn everything there is to know about tactical asset allocation.

Tactical Asset Allocation - What Is It?

In short, tactical asset allocation, or TAA, is an active form of investing. It is a strategy that diversifies an investment portfolio between cash, stocks, and bonds (three primary asset classes). The logic behind this style is that asset allocation creates a larger impact on the growth of an investment portfolio than that of the asset classes it comprises. How? By adjusting long-term weights to short-term, and capitalizing on the benefits.
 
Under TAA, the portfolio is actively managed and adjusted for on a short-term basis; however it does leverage some passive investing, index investing, and buy-to-hold methods for best results. The idea is to keep the returns pumping, and to minimize risk. So if an initial selection is negatively performing, an investor would modify the mix, hoping to increase returns to the desired value.

Investment Factors

Investors do not make a decision on how to allocate across an investment portfolio based on a whim. We wish it were that simple. There are investment factors to consider which include:

• Return objectives - this is your roadmap, determining how much you are expecting to be returned to you in the future using an investment strategy and incorporating a level of risk. In other words, these are your goal factors.
• Risk tolerance - your risk appetite, or the level of risk an investor is willing to accept. How willing are you to lose some of your initial investment in exchange for probable future gains?
• Time horizon - how long an investment can be held before the funds are required. The typical rule of thumb is greater the length, the riskier the portfolio. The reasoning here is you have time to make up for short-term losses (generally incurred with relatively riskier assets) in pursuit of your long-term goal.

 
Each of these factors are built into an investment portfolio, and utilized when determining the types of assets to include, how to diversify them, and the best way to distribute the funds across each of the asset types.

How Does Tactical Asset Allocation Work?

Tactical asset allocation doesn’t rebalance the asset selections. Instead it periodically adjusts the percentage of allocations, otherwise known as the weight, across the portfolio, usually by 5% to 10% (small amounts).

Investment Choices

Welcome to the universe of investing, where there are multiple types of vessels you can use to grow your money. These vessels are considered asset classes and include:

• Stocks or equities
• Bonds or other fixed-income securities
• Cash and cash equivalents including treasury bills, savings deposits, money market funds, and more
• Real estate and other tangible assets
• Derivatives

 
The type of investment depends on your responses to the investment factors. If you don’t mind carrying a high level risk, for example, you may consider investing in aggressive stocks versus those that are slow growth.

Asset Allocation Weight

Portfolios are allocated and categorized by a weight. This is expressed as a percentage across the asset classes and can be considered over-weighted, under-weighted, or neutral-weighted.
 
Assets are considered neutral-weighted when they are performing in sync with the market. Should they outperform the market they are then considered over-weighted. And when they underperform, under-weighted.
 
It’s important to keep an eye on the asset allocation weight as they change along with the markets. For example, let’s say a portfolio is initially set-up to have 40% vested in stocks, 40% in bonds, and 20% cash or cash equivalents. In the short-term, stock prices trend upward, creating an increase in the percentage mix for stocks, and a decrease across other asset classes. To get back to a neutral-weight, investors may consider selling some shares and re-distributing it across the portfolio to balance back to the initial set-up.
 
The simplest way to calculate the asset allocation weight is to divide the dollar value of the asset class by the total dollar value of the investment portfolio. A secondary option is to divide the number of units held within an asset class by the total number of shares or units the portfolio holds.

What Are the Benefits to Tactical Asset Allocation?

Tactical asset allocation associates with several benefits. The end result, when managed and allocated properly, is investment growth. Let’s look at a few functions they serve.

Investment Returns Soar

In review of the investment portfolio, look for areas where it performs better overall. That’s part of the strategy here with tactical asset allocation. It’s not just a re-balancing act, but a way to hone in on the strong performers. They will be the reason behind the high return on your investment.

Adapts to Changes in the Market

Regardless of whether the economy is in a state of inflation or deflation, if there are changes in unemployment rates, etc. Tactical asset allocation remains flexible, attaching itself to the asset classes that are achieving exemplary returns versus those that are floundering given the economic state.

Diversified Portfolios

How comfortable are you with risk? By diversifying your portfolio, you are reducing the level of risk while welcoming sizable returns. This is also known as hedging your investments. Diversified portfolios balance out the weight of your investments, keeping away that awful feeling in your stomach as the market fluctuates up and down. No, it does not guarantee you will see a profit nor does it guarantee your portfolio against risk.

How Does Tactical Asset Allocation Differ From Strategic Asset Allocation?

Strategic asset allocation, or SAA, focuses on the long-term needs of a portfolio. SAA does rebalance allocations on a periodic basis, but the root cause stems from unrealized gains or losses reported in each asset class.
 
SAA is similar to a buy and hold strategy whereas TAA is an active one. It is a widely used style of investing, but it should be used for long-term objectives. If your plan requires a short-term opportunity, it’ll be better off with TAA.

Other Investment Styles and Strategies

Investment styles are those that investors choose when managing money in a portfolio. How they choose the style depends on parameters discussed earlier, such as risk tolerance, growth objectives, etc. And when they act on it, they can be on the conservative side or take an aggressive approach.
 
Tactical Asset Allocation is not the only investment style available to investors. Each portfolio carries an objective, and those objectives may not be one-size-fits-all. Below is a list of other investment styles to choose from:

• Passive investing - buying and selling investments to match the market’s performance. Investors are not acting as if they are in a race to cross the finish line with this style.
• Growth investing - investing in a company that is capable of rapid growth, or capital appreciation.
• Value investing - who doesn’t like a good deal, right? Value investing is a style that looks for securities that are underpriced.
• Dividend growth - continuous growth from company dividends.
• Index investing - low cost method that tracks an index. It is a passive form of investing and includes index mutual funds and exchange traded funds, or ETFs. ETFs, for example, work well with sectors. They allow the investor to choose an area that they feel has the highest return.
• Buy and hold investing - exactly as the name states, trading is not frequent as investors purchase and hold the investment with hope that it will appreciate over time. This is a form of passive investing with a focus on long-term growth.
• Market capitalization - investing in stocks associated with the size of a company. Examples include small-cap, mid-cap, and large-cap. Large-cap stocks are known to be more stable whereas small-cap are riskier.

 
Remember, strategy is the key to the success and growth of an investment portfolio. Familiarize yourself with the styles, understanding the level of risk each poses against your future savings and the rate of return.

To Sum It Up - Why Wait?

Take advantage of tactical asset allocation. You’ll conquer the short-term risks while boosting your investment earnings. Diversifying your investment portfolio between stocks, bonds, mutual funds, ETFs, and more maintain a level of balance. The importance is how these assets are distributed across your portfolio so that your objectives are met overtime. If you are unsure, don’t hesitate to reach out to a financial advisor who can help pave the way to your future financial freedom.
 
Exchange traded funds, or ETFs, are one type of asset available to add to your portfolio. Their return may not be visible overnight, but remember, slow and steady wins the race. Visit LifeGoal Investments to learn about ETFs they offer on the market and how to begin the journey to creating long-term growth.
 
Sources:
Asset Allocation | FINRA.org
Beginners' Guide to Asset Allocation, Diversification, and Rebalancing
Tactical Asset Allocation (TAA) - Overview, Reasons, Example
Using Tactical Asset Allocation Strategy in Your Portfolio
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