Midweek Musing – is tactical asset allocation worthwhile?

What is tactical asset allocation?

To answer that question we need to start by understanding the preferred starting point of the ‘alternative’ strategic asset allocation. This is the concept of building a portfolio with a range of asset types with varying degrees of correlation so as to achieve returns in line with our objectives at an acceptable level of volatility.

Investment theory developed over many decades suggests that the ‘right’ asset mix will see returns inevitably impacted by short term systemic changes in market direction, but that the worst volatility will be smoothed out in a well designed portfolio and over the long term returns will be reasonably predictable. Because the market’s short term volatility is in effect allowed for in the model asset mix, provided no major cash flows in or out take place, the asset mix can be generally left alone.

The idea of a well diversified long term mix of equities, bonds and maybe property, commodities and cash is the foundation of all multi-asset portfolios although some narrower equity/bond mixes are promoted as low cost ‘risk controlled’ and ”buy and forget’ products by all sorts of invesment advisers from Vanguard and BlackRock with their passive index trackers to expensive wealth management firms with their model portfolio offerings.

Although I started by saying that what I am calling strategic asset allocation is the alternative to tactical asset allocation, that was really not accurate. Tactical asset allocation is an overlay, or development of strategic asset allocation.