A tactical asset allocation strategy is a dynamic investment strategy in which investors change their target asset allocation according to the valuation of assets. While some may argue this is market timing, it is quite different from how most people implement market timing.
The stock market has earned an average of a little less than 10% per year over a long period of time. But the average investor’s actual returns are at least two percentage points lower because people tend to buy when prices are high and tend to sell when prices are low. Because people allow their emotions to control their investment decisions, their form of “timing the market” has proven to be detrimental to investment returns.
Trying to predict whether the market is going up or down and investing accordingly is a bad form of market timing. A tactical or active asset allocation strategy as used by the Arbor Asset Allocation Model Portfolio (AAAMP) is a completely different way of thinking about the market. The portfolios’ disciplined approach uses the “Cycle of Market Emotions” and allocates more money to assets when their prices are low and less money when prices are high.
While to a novice this may seem similar to market timing, it is actually quite different, and in some ways the opposite. Instead of predicting what the market will do, an active asset allocation strategy involves fundamental analysis of an asset to determine its’ risks and opportunities for reward in comparison to the universe of investment assets. Then, while maintaining a properly diversified portfolio, investors would take an over weighted position in assets with good value and an underweighted position in assets that are over priced.
A tactical asset allocation strategy has kept the Arbor Asset Allocation Model Portfolio (AAAMP) under weighted in stocks at peak prices and over weighted in stocks at bargain prices. The overall effect has been to greatly reduce portfolio volatility (risk) and improve portfolio performance by preserving capital in bear markets for investment at bargain prices.
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Related Reading: Why Tactical Asset Allocation Strategy is Changing the World