Tactical Asset Allocation – All You need to know

Tactical Asset Allocation – All You need to know

Tactical asset allocation is a moderately active strategy, unlike strategic allocation strategy.

tactical asset allocation
Balance concept with different spheres. (3d render)

What is a tactical asset allocation strategy?…

This strategy is an active portfolio strategy to capture the short-term investment opportunities.

In addition, in this strategy, the asset allocation weight will be increased or decreased based on the price anomalies.

Again, once the desired profit is achieved, the weights of the assets will be back to the original weights that were taken at the time of asset allocation.

Moreover, this strategy allows portfolio managers to take advantage of certain situations in the market.

And it is a moderately active strategy.

Because the portfolio mix will come back to its original once the expected short-term gain is achieved.

Tactical Asset Allocation Basics (TAA)…

You need to understand strategic asset allocation first before understanding TAA.

In addition, a portfolio manager may create an asset allocation under strategic allocation with a different mix of assets.

And for doing this, he will consider your age, risk tolerance, time period, financial situation, etc.

Moreover, he will consider returns expected from the assets and asset weight in the portfolio.

Finally, he will consider taxes, liquidity, legal and time horizon, etc. under strategic asset allocation.

Here, the percentage weight in each asset class over a long period is called strategic asset allocation.

And the allocation is the mix of assets, and the weight of the asset will help the investor achieve his financial goals.

In addition, below is the example for simple asset allocation with weights under strategic asset allocation.

  • CAsh 15%
  • Bonds 35%
  • stocks 35%
  • commodities 15%

Tactical asset allocation usefulness…

Let’s assume in the above assumption that stock market investment is not favourable in the coming year.

In addition, a correction is about to come in stocks.

In this case, the portfolio manager will tacitly decrease the stock exposure to 10% and will increase the cash exposure to 40%.

  • Cash 40%
  • Bonds 35%
  • stocks 10%
  • commodities 15%.

Again, once the stocks corrected to the desired level, the manager will bring back asset weights to the original values that were assumed at the beginning.

Generally, this tactic strategy is implemented for 5% change in asset weights.

But sometimes, this change will be more than 10% if the manager is sure about the short-term investment opportunity.

In addition, tactical asset allocation is different from rebalancing a portfolio.

And rebalancing is done in strategic asset allocation to bring back to the original asset weights.

While in tactical asset allocation, the asset weights are changed to gain from the short-term opportunity.

And will come to the original weights once the short-term gain is achieved.

taa

 

Types of Tactical Asset Allocation…

Taa can be discretionary or systematic.

In discretionary TAA, the investor will adjust the asset allocation.

If the investor with substantial holdings may decrease his stock holding if he thinks that the bonds are expected to perform better than stocks for the short term.

In addition, the investor will bring back stock weight to the original weight once the short term from bonds is captured.

Conservely, a systematic tactic asset allocation uses a quantitative investment model to take advantage of inefficiencies or temporary imbalances among different asset classes.

Finally, these shifts use a basis of known financial market anomalies, or inefficiencies, backed by academic and practitioner research.

Read about 6 asset allocation strategies that will work for you.

Also read about nifty 50 investment: What is the best time to buy and sell?

And read about asset allocation and its importance…

Also read about Market Up and Down Capture Ratio…

And read about dynamic asset allocation.

Also read about portfolio rebalancing strategies—all you need to know…

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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