What is Tactical Asset Allocation? Definition
Tactical asset allocation is defined as a dynamic portfolio management technique. It works by taking advantage of near-term shifts when determining changes within a portfolio or group of portfolios.
Whereas a strategic asset allocation only targets the intended time horizon and risk tolerance of the individual investor, the tactical asset allocation involves making near-term adjustments to the overall exposure in each asset category.
Principles
Tactical asset allocation incorporates the same principles of modern portfolio theories and efficient market hypotheses.
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However, it also employs a time-sensitive analysis when comparing the impending shifts in one asset category versus another and the decision to shift more into what is favored.
Example
Here is an example of a tactical asset allocation at work in a portfolio:
If an investor had a moderate risk appetite with a mix of 80% equities and 20% debt in his/her portfolio, the portfolio manager would periodically reassess the macroeconomic trends to gauge the relative value in comparing risk vs. return of those two asset classes to determine the most balanced mix for the most reward for the amount of risk taken.
There are no hard and fast rules in money management, and there are proponents who favor both styles of asset allocation.
The advantage of the tactical asset allocation model is its ability to soften the blows from larger shocks to the market and enhance the time it takes to recover from those losses.
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