tactical vs strategic asset allocation

Understanding Tactical vs. Strategic Asset Allocation

by Kevin Woods

Physical and financial well-being have a lot in common, including the reality that multiple factors impact both types of health. Just as good lifestyle habits and regular medical checkups help people stay healthy throughout their lives and well into old age, good financial habits, including careful budgeting and making wise investments, increase the chances that individuals and couples can enjoy a comfortable lifestyle throughout their working years and eventual retirement.

Building a diverse portfolio has long been a strategy for managing risk while also leveraging the unique advantages of different asset types. Investors also take diverse approaches to managing their portfolios in the way they allocate their assets. These approaches can broadly be divided into two asset allocation models: Tactical and strategic. As their names suggest, these approaches differ in flexibility as well as the way they leverage the time needed to reach financial goals.

What Is Asset Allocation?

Asset allocation involves dividing an investment portfolio by different asset types. In a diverse portfolio, it is not uncommon to see a range of assets with their own unique characteristics. The assets themselves, such as stocks, bonds, real estate or even cash, have different levels of risk and earning potential. Investors may opt to allocate percentages of their portfolio to different types of investments in hopes of reaching their financial goals. 

These percentages tend to reflect an investor’s comfort level when it comes to financial risk: Financial products such as stocks, even those that are considered to be “blue chip,” cannot and do not guarantee returns, and there is always the chance that investors may lose some or all of their principal. At the same time, an overly conservative approach to investing can result in a stagnant portfolio that doesn’t grow as well as missed opportunities.

Tactical Vs. Strategic Asset Allocation

Asset allocation isn’t a simple process, and using a cookie-cutter approach to determine asset classes and percentages usually doesn’t help investors maximize their portfolio’s potential. Allocation takes time and thought, along with an approach that best meets the needs of the individual investor. 

Tactical Asset Allocation

Tactical asset allocation is an interactive approach to investing that focuses on short- and medium-term goals. Investors choose assets based on expected market or sector performance over the next few months and years, and make changes in their allocations and assets as needed to meet performance goals. In other words, they move in and out of the market. This approach often suits a particular personality type that can combine discipline with the ability to face down anxiety as market conditions change.

Strategic Asset Allocation

Strategic asset allocation is an approach that focuses on long-range goals and takes a more hands-off approach. Investors divide their portfolio among reliable assets like stocks and bonds and allocate them accordingly. The choice investments are held on to for the long term in anticipation of an increase in value. 

It should be noted, however, that strategic asset allocation isn’t completely set-it-and-forget-it: While the emphasis is on letting assets ride out market vicissitudes, there are times when adjustments need to be made, particularly when a previously reliable asset shows signs of losing value. These changes may include the assets themselves or the percentages allocated to them in the portfolio.

Which Allocation Approach Is Best?

Both allocation approaches have their advantages and shortcomings. For risk-averse investors, as well as those who prefer to not constantly monitor markets and their portfolios, strategic asset allocation is a solid option. For those who can tolerate more risk, who hope to grow their wealth more quickly or who simply like to be involved in the ongoing management of their investments, tactical asset allocation may be the best choice.

Deciding on the correct approach, the selection of assets, their allocations and their management are all separate issues. A registered wealth advisor at Gratus Capital may be able to provide guidance in all of these areas. Wealth advisors get to know you, your family and your goals and, with that information, develop an investment plan that might lead to the results you are hoping for. 


Beginners’ Guide to Asset Allocation, Diversification, and Rebalancing

What is asset allocation and how does it work?