Today’s investors clearly face significant challenges in meeting investment objectives, particularly in an environment of relatively modest returns. Identifying and efficiently executing an appropriate asset allocation strategy to meet those investment objectives is important.
Neither strategic nor tactical portfolios will shoot the lights out, as they are structured to obtain a specific return for a particular risk over a market cycle which is generally defined as eight to ten years.
- The primary goal of a strategic asset allocation is to create an asset mix that will provide the optimal balance between expected risk and return for a long-term investment horizon. In other words, there is no attempt on the part of the investors to purposely deviate from the original determined weights. The emphasis is on preserving the fixed weights because they ultimately relate to a larger performance objective.
- Tactical would be more suitable for investors who want to see the sails of their ships adjusted as the winds change direction. The objective of tactical asset allocation is to move among various asset classes within a risk-controlled framework to seek to create an additional source of return. An attempt is made to take advantage of short and intermediate term market inefficiencies as a means of managing investors’ exposure to market risk by evaluating the relative attractiveness of equity and fixed income markets through financial valuation, growth and sentiment measures. The investment philosophy is usually based on the belief that investor psychology and market forces can lead to periods of misevaluation. A tactical allocation process attempts to capture these misevaluations.
In summary, it is fundamental to decide upon an investing strategy, and stick to it. It can be compared to setting a course when starting on a long journey and following it faithfully. On a tactical level, you simply adjust your route only when conditions change. The type of asset allocation strategy that works the best for you then will depend largely on your time horizon and your ability to tolerate risk.
I suggest that investors must realize that asset allocation is critical when seeking an investment strategy. They should spend a great deal of time and effort on making sure their asset allocation strategy best reflects their temperament, time frame and objectives.
So in the words of the famous saying, conservative investors aim to keep the “bird in the hand,” while aggressive investors seek to gain the “two in the bush.”