Tactical Allocation:
What Is Tactical Asset Allocation—and Why Do We Use It?
Wouldn't it be nice if someone could tell us exactly when to get out of the market and exactly when to get back in? Unfortunately, investing doesn't work that way. Nobody has a crystal ball. Nobody consistently knows when the next bear market will begin or when the next bull market will take off. So why do we use tactical asset allocation?
What does "tactical" actually mean?
At its simplest, tactical asset allocation means that we're willing to adjust portfolio exposure as market conditions change. A traditional approach might establish a target allocation and maintain it through different market environments.A tactical approach is more flexible. If the evidence suggests that risk is increasing, the allocation can be adjusted. If conditions improve, exposure can be increased again. That sounds simple. In practice, it isn't.
Tactical doesn't mean trying to predict the future
This is one of the biggest misconceptions. We're not trying to predict what the market will do next Tuesday. We're not trying to call the exact top or bottom. Instead, we're trying to respond to what the market is actually doing. There will inevitably be false signals.There will be times when we make a change and the market turns around shortly afterward. That's part of investing.
Why use the approach?
The reason is simple. We believe losses matter. A large loss can require a disproportionately large gain just to get back to where you started. And for someone taking withdrawals during retirement, the consequences can be even more significant. That doesn't mean we believe tactical management will outperform all the time. It won't. There are periods when being fully invested will produce a better result. That's the trade-off.
The bigger picture
Tactical allocation is not a substitute for financial planning. It is one component of an overall strategy. The portfolio still needs to reflect the client's goals, income needs, time horizon and tolerance for risk.
A Smart Moment takeaway
Tactical investing isn't about predicting the future.
It's about being willing to recognize that market conditions change—and being willing to adjust when the evidence supports doing so. That philosophy has been an important part of how we manage portfolios for our clients.
Read the full blog at https://conta.cc/4jTuwLH