Reuters Money
Tactical asset allocation might become your new normal
Market volatility is like a headache that hangs on. The cure may lie in shifting your mind from keenly focusing on risk instead of returns.
For many, this is an obvious no brainer, but it involves much more than simply shifting into cash, bonds or gold. What if you don’t want to exit stocks entirely? Then you may need what money managers call tactical asset allocation.
Instead of a long-only, hold-on-for-dear life approach of traditional investing, tactical planning involves shifting in and out of assets as market conditions dictate. In a turbulent market, there are several asset classes that can buffer stock downturns that can be found in several off-the-shelf mutual funds.
The linchpin of tactical investing is flexibility. It’s the opposite of the 60-percent stocks, 40-percent bonds fixed template. As a dynamic model, tactical portfolios are often open to moving into non-financial assets such as gold, real estate and commodities.
What I like best about tactical allocation is that it doesn’t go whole hog on any one asset class. Instead of loading up in the usual suspects in a bearish stock market — such as U.S. Treasuries or gold — it’s open to opportunities around the world. This can avoid big timing blunders and the prospect of being stuck in the wrong asset when markets turn.
It may be a while before the stock market turns bullish again when it’s being pulled in a number of negative directions. European debt woes, a sluggish U.S. economy and the prospect of a global recession are a menacing “lethal trifecta,” as Mohamed El-Erian, Chief Executive of PIMCO, noted recently.
“I worry that, absent a dramatic change in policies in America and Europe,” El-Erian wrote, “things will get worse before they get better. I fear that, given this possibility, it would then take years, if not decades, to repair the underlying damage done to economies, jobs and people’s lives around the globe.”
The end of buy and hold?
This post was originally published at Portfolioist.com.
Since the market turbulence of the late 2000s shot investors’ faith in more traditional investing, there’s been quite a lot of discussion of Tactical Asset Allocation.
This form of investing focuses on allocating certain portions of your portfolio to different asset classes, and then ramping up or pulling back on any one of those classes depending on certain factors.
The most common of those factors is valuation: if stocks, for example, start to look very cheap based on historical metrics (like price-to-earnings ratios) you might load up on those. World events might drive some sector rotation as well. Uncertainty in the oil producing regions of the world might convince an investor that there could be an economic slowdown brewing and push them to put more into cash.
Doubts about tactical asset allocation
In a way, it’s a middle ground between trying to pick individual winning stocks and hands-off investing, which focuses on the long term and minimal trading. The problem is, it’s hard to consistently do well.
Wall Street Journal columnist Jason Zweig is among those who argue the strategy still has a lot to prove. “The frustration of both individual investors and professional investors after the past 10 years of agony, I guess, we should call it, is really, really high. And it’s completely understandable; people have thrown their hands up. They say, buy and hold doesn’t work. The whole ‘stocks-for-the-long-run’ thing isn’t working for me anymore,” he explains. “So I’m going to do something different, and I’m going to take control…[but] common sense would tell you that if you didn’t do so well when you were making a small number of decisions, going to a system in which you’re going to make a large number of decisions and expecting that you’ll be right more often probably isn’t the best way to think about it.”
Too many problems and too few solutions.
What about tea leaves?
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