Why Tactical Asset Allocation is Changing the Investment World

by KenFaulkenberry

in Asset Allocation

Tactical Asset Allocation

Tactical Asset Allocation

A tactical asset allocation is the value investors most important strategy tool. Buy and hold has failed for most investors. This is partly because it doesn’t work well in secular bear markets, and partly because investors let their emotions cause them to make poor decisions. This can be corrected by concentrating on value.

What is Tactical Asset Allocation?

Tactical asset allocation investing is an active strategy which allows portfolio managers to change their target asset allocation according to the valuation of assets. It involves a continual management of risk through frequent portfolio rebalancing to a flexible asset allocation target.

We know from history that when asset prices are lower than their  fundamental or intrinsic value they provide higher than average rates of return in the long run. When asset prices are expensive compared to their fundamental value they provide lower than average rates of return in the long run.

The purpose of a tactical asset allocation strategy is to increase risk adjusted returns as compared to a fixed or strategic asset allocation. The idea is to be more aggressive (invest more money) in lower risk undervalued assets, and be more conservative (invest less money) in higher risk overvalued assets.

Cycle of Market Emotions

Tactical Asset Allocation

Tactical Asset Allocation

Investors can take advantage of portfolio volatility if they understand market emotions affect asset prices. When focusing on value, investors can look for opportunities in assets that are experiencing extreme pessimism, and look to take profits in assets that are experiencing a buying euphoria.

This is What You Should Remember About Tactical Asset Allocation

A tactical asset allocation strategy is the key tool to limit portfolio drawdowns and manage risk. All secular bear markets begin with high valuations. A tactical asset allocation provides the portfolio manager the flexibility to control losses by avoiding high valuation assets.

If you lose 50% of your portfolio it takes a 100% gain to get back to break even. The fact that large portfolio losses reduce the capital needed for investment at lower prices makes maximum portfolio drawdown a critical concept. It also accentuates how a tactical asset allocation can transform your investment future.

The principles of a tactical asset allocation can be applied to asset categories, sub-categories, sectors, and individual investments. As a value investor you want to only own assets that are priced with a margin of safety.

A value oriented tactical asset allocation puts the focus on owning assets priced below their intrinsic value. You don’t need to take excessive risk in order to  obtain high rates of return. High long term returns are obtained by investing aggressively when the odds are heavily in your favor, and preserving capital when risks are high.

Related Reading: Value Strategies For Asset Allocation

Mr. Market and the Intelligent Investor

Shiller PE 10: An Important Stock Market Valuation Tool

Investment Portfolio Management Basics: Risk, Asset Allocation, & Investing Strategies


Written by KenFaulkenberry

KenFaulkenberry

AAAMP Blog by Ken Faulkenberry
Ken Faulkenberry earned an MBA from the University of Southern California (USC) Marshall School of Business with an emphasis in investments. Ken has 25 years of investment experience and is dedicated to helping people with self-directed investment management through the Arbor Investment Planner. His asset allocation strategies have an outstanding performance record.
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{ 2 comments }

Ann M.

Thanks for this post. Conceptually, this makes a lot of sense to me. My question is, how do I do this? For example, say I have an IRA with Vanguard… I understand that I’d have to request a rebalancing of my portfolio based on valuations but, first, where do I find out the valuations of such funds and 2) once I know the valuations, how do I go about using that information (the fund valuations) to determine how y funds should be re-balanced? I’m very much so a novice, so forgive me for what might be a silly question.

KenFaulkenberry

It’s very difficult to do with mutual funds. I much prefer using individual stocks. I do help some of my premium subscribers do it with mutual funds because they have no other options, but it takes a lot of time and effort. Let me know if I can help you through my premium service.
P.S. There are not silly questions….keep learning Ann!

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