Tactical Asset Allocation

How to invest using a dynamic or active allocation for your portfolio

Tactical allocation is dividing and investing your money in various asset categories, using an allocation which changes over time.

 

Both the categories and the amount invested in each category can change on a regular basis. For example, some tactical allocation methods will change the investments used every month.

 

Tactical allocation is also called "dynamic allocation," "active management," or "global tactical asset allocation" (GTAA). 

 

Pros and Cons of Tactical Asset Allocation

 

The Pros - Benefits of a Tactical Asset Allocation

  • Can be implemented using ETFs or low-cost mutual funds
  • Many different options to choose from, each using a distinct approach
  • Returns can be better than a Strategic Allocation
  • A tactical allocation can take full advantage of changes in economic conditions. For example, if interest rates are rising (affecting bond prices) or if the economy is in recession (affecting stock prices), a tactical portfolio can change the assets that it holds to improve returns.

 

The Cons - Possible disadvantages of a tactical asset allocation

  • Can be tax consequences for buying and selling more frequently
  • Incurs more brokerage fees since you are buying and selling more frequently
  • If you are implementing the portfolio yourself, it requires your time to rebalance the portfolio on a monthly or quarterly basis
  • If you hire an adviser to implement your portfolio, the fees can be higher than other options

 

Examples of Tactical Asset Allocation portfolio recipes

There are many portfolio recipes that use a tactical (or dynamic) asset allocation. These portfolio recipes fall into several categories. Examples include the following:

  • Risk vs. Reward. These tactical recipes compare a portfolio's risk and volatility metrics to the portfolio's return. Several different approaches to creating a risk vs. reward portfolio, including Adaptive Allocation, Diversification, and Correlation.
  • Momentum. This approach tracks which asset classes have performed well recently, and allocates more to those asset classes.
  • Macro / Global. This approach adjusts its portfolio recipe by looking at fundamental economic indicators. These metrics can include inflation, gross domestic product (economic growth), corporate earnings, country-by-country differences, and geo-political events.
  • Hedged / Market Neutral. This approach attempts to remove most market variation from a portfolo and just keep the upside by selecting assets that complement each other or by borrowing to offset investment positions.
  • Tactical Blended. This approach uses a combination of the above allocation methods.

 

 

How to implement a tactical asset allocation for your portfolio

1. Choose a Tactical Allocation "portfolio recipe" or fund

Possible sources include the following:

 

2. Buy the funds or stocks needed for your portfolio recipe.

Typically, your portfolio recipe uses exchange-traded funds (ETFs) or mutual funds as ingredients. You can do this at a discount broker or full-service broker.

 

3. Rebalance on a quarterly or annual basis.

Rebalancing is buying or selling a portion of each asset so that the percentage allocation returns to the original allocation specified in the portfolio recipe. Since you are using a tactical (dynamic) allocation, you may need to rebalance monthly or more often. A portfolio-oriented brokerage can be useful for rebalancing, since they charge a flat fee each time you rebalance your portfolio, no matter how many buys or sells that requires.