Tactical Allocation: How to Build Your Investment Portfolio to Reach Your Maximum Potential
Investing in the financial markets can often be confusing especially when it comes to managing your money. With so many options available to you it can be difficult to work out what is the best approach to take in order to get the most out of your investment. This is exactly where tactical allocation comes in.
Tactical allocation is a dynamic investment style that aims at the optimization of the portfolio by manipulating the asset allocations in relation to the market conditions. In this article, we are going to find out what tactical allocation is and how it can help you to reach your financial goals.
What is Tactical Allocation and How Does It Work?
Tactical allocation is the process of adjusting the investments in your portfolio for the short-term market trends. This is unlike the usual buy and hold investment strategies that seek to take advantage of the market inefficiencies and take positions at certain times. The main goal? To get more returns through the process of reallocation of the funds into the asset classes which are likely to perform well in the current market environment.
For example, when the economy is growing and the stock market rises, a tactical allocation strategy may suggest increasing the equity exposure and reducing the exposure to bonds or cash. On the other hand, during periods of economic decline or market corrections, it could suggest reducing equities and increasing exposure to bonds or gold.
Why You Should Consider Tactical Allocation
The following are the advantages of tactical allocation that can help investors to achieve their financial goals:
- Improved Returns: Tactical strategies are designed to deliver higher returns than the passive strategies because they make periodic adjustments in asset allocations.
- Risk Management: This approach enables the investor to reduce the risks that are associated with the portfolio by reallocated the assets in case of change in the market conditions.
- Agility: Tactical allocation is quite different from the static buy and hold strategies which cannot capture the changes in the market and grab the small time opportunities.
- Diversification: Normally, tactical strategies lead to diversification across different asset classes which reduce the volatility of the portfolio and enhance returns for the level of risk taken.
How to Develop a Tactical Allocation Strategy?
To build a tactical allocation strategy, it is important to perform a thorough analysis and make important decisions in regards to this
Here are some pivotal steps to consider:
- Set Your Investment Goals: First of all, define your investment purpose, the level of risk you are willing to take and the time you intend to invest. These metrics will guide your asset allocation decisions.
- Track Market Movements: Stay current on market actions, news, and analyses, as well as economic data and political events that can affect asset valuations.
- Discover the Potential: Start analyzing different assets to determine which ones are most likely to perform well in the current market environment.
- Rebalance Your Portfolio: Based on your findings, you can increase or decrease your investment in certain asset classes.
- Monitoring and Adjustment of the Strategy: It is recommended to monitor the portfolio’s performance frequently and make changes if the asset allocation is different from the desired one.
Case Study: Tactical Allocation in Practice
The following is an example of how tactical allocation can be useful in real-life scenarios. Let’s say there is an investor who has a portfolio composed of 60% stocks and 40% bonds. When the economy is on the rise, the tactical approach would recommend increasing the equity exposure to 70% and decreasing the bond exposure to 30%.
As the stock market continues to rise, this investor's portfolio also gains significantly due to the higher equity exposure. However, as the economic conditions change and the market turns bearish, the tactical approach would advise reducing the equity exposure to 50% and increasing the bond exposure to 50%.
Through this approach of adjusting asset allocations according to the movement in the market, this investor was able to capture the growth in positive conditions and protect his portfolio in the downward trends. This flexible strategy provided better returns than the traditional buy and hold strategy.
Conclusion
Tactical allocation is one of the most important investment strategies that can help to increase your portfolio effectiveness. Tactical strategies attempt to achieve higher returns and reduce risks by continuous monitoring of asset allocations in relation to the market. Tactical management requires a close analysis of the market, close monitoring of the portfolio, and its frequent adjustments. Thus, incorporating tactical allocation into your investment plan will help to improve the performance of your portfolio and, therefore, to reach your financial goals.
