Based in Kingsport, TN
Tactical Asset Allocation
Strategic Asset Allocation
For today’s dose of education, we are going to breakdown two different types of Asset Allocation strategies, Tactical vs. Strategic Asset Allocation. Asset Allocation is basically how you divide your assets between different investment classes or groups, such as small cap, large cap, value, growth, stocks, bonds, cash, etc. With that in mind, research shows that around 90% of investment returns are determined by the portfolio Asset Allocation, so one can see the importance of these strategies.
Strategic & Tactical Asset Allocation are sometimes confused with being the same thing, but there are distinct differences and potentially different outcomes. With that being said, let’s look at both strategies:
Strategic Asset Allocation
Strategic Asset Allocation is a portfolio strategy involving setting target allocations for different asset classes and periodically rebalancing them, with a more buy-and-hold overall strategy. The portfolio is rebalanced to the original allocations when, due to different returns from the different assets, deviates significantly from the initial portfolio.
Pros: Easy to maintain, based on long-term trends and suitable for investors who sleep at night knowing that their portfolio is long-term, and in-line with their risk tolerance and will meet their long-term objectives.
Cons: Strategic Asset Allocation does not allow for anomalies in the marketplace and consequently, can underperform the markets on a regular basis and/or does not allow one to take advantage of potential opportunities.
Tactical Asset Allocation
Investopedia defines Tactical Asset Allocation as:
An active management portfolio strategy that rebalances the percentage of assets held in various categories in order to take advantage of market pricing anomalies or strong market sectors.
Tactical Asset Allocation is a moderately active portfolio management strategy to benefit from investment opportunities in the market. Instead of having each allocation “static”, a buy-and-hold approach with rebalancing as things get out-of-whack, TAA may take advantage of certain situations in the marketplace. Utilizing TAA, a portfolio may involve overweighting or underweighted in a certain asset class to take advantage of upcoming marketplace situations.
For instance, the portfolio manager may determine that Large Cap Growth, Small Cap Value or even Commodities should do well, so a portfolio may overweight in these asset classes or underweight in others to (hopefully) take advantage of the opportunity.
TAA is considered a moderately active strategy since managers or individual investors eventually return to the portfolio’s original asset allocation.
Pros: Offers a lot of different alternatives to choose from, each with a different strategy. Returns can be significantly better if TAA has been applied with success. Allows for flexibility to take full advantage of changes in economic and market conditions.
Cons: Can have a higher tax impact from buying and selling, unless in an IRA or Roth IRA or other qualified account. Dependent on the successful (or unsuccessful) outcome of the implementation of Tactical Asset Allocation.
Our TacticalSHIFT® is an optional Tactical Asset Allocation strategy. It is designed to move all investments within the portfolio temporarily to cash/money market during high stock market risk.
The TacticalSHIFT® gets triggered automatically when certain (reliable) criteria are met. When the TacticalSHIFT® models determine the risk or threat is reduced, the portfolios are returned to the original, customized portfolio established during signup with iInvest®.
TacticalSHIFT® is meant for Pre-Retiree and Retiree’s who are in the later years of investing, when accumulation turns to distribution and the Retirement Income Management phase of investing begins.
During the early years of investing, a Tactical Asset Allocation strategy is not as necessary due to Dollar Cost Averaging, Compounding Interest and the Time Value of Money. The early years of investing is when a traditional Strategic Asset Allocation model is used by iInvest®.
This phase involves a customized portfolio for each account/goal a client has, and a “buy and hold” strategy. However, with Smart Rebalancing, Dividend Reinvestment, Tax Loss Harvesting and Better Behavior, all phases of investing with iInvest® are designed for better returns than the average private client.
If you are interested in learning more about TacticalSHIFT® technologies feel free to contact us today.
Written by Craig Dillon
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