Why Tactical Asset Allocation?

Abstract

A frequently cited Ibbotson study (2009) shows that over an 80-year period, large and small stocks have provided the highest returns and largest increases in wealth. The problem is not the math, it’s the logic: How many investors have an 80-year investment horizon? Most face two lifetime financial phases: 20–25 years spent accumulating wealth and a like period spending it in retirement. Considering the brevity of the two draws attention to the extended secular bear markets that would have negatively affected their outcome: 1929–1949, 1966–1982, and 2000–?? Such extended declines can devastate retirement savers, making lifetime financial success an accident of birth as opposed to purposeful planning. In structuring client portfolios, the goal is not about beating active or passive indexes, but rather providing returns over time that help achieve long-term investment goals while minimizing the emotional trauma along the way. An investment portfolio needs to be constructed to account for all market conditions, and this means including both tactical and more traditional asset allocation strategies. The author attempts to explain the value of tactical asset allocation within a portfolio and how it works; what are the upsides/downsides; what do financial advisors, asset managers, and end-clients need to know; and some tips learned along the way.