Tactical Investing: Strategies for Beating the Market Consistently
This is what tactical investing is all about, finding ways to beat the market and not just by sitting on your investments. But there is one more approach that is starting to become popular: tactical investing. This style of investing is more active and involves the trading of assets with the view of optimizing the portfolio. In this article, we will define what tactical investing is and discuss how it is possible to get returns that are better than those of the market.
What Is Meant By Tactical Investing?
So, what is tactical investing? It is a dynamic investment style that seeks to take advantage of short-term price changes in the market. Tactical investors do not follow the buy and hold strategy but instead watch the market and make changes in the portfolio investments that they make. This makes it possible to enter the market and exit it when the market conditions are favorable.
There is a central thesis in tactical investing that the market is not always efficient. Psychological factors and behavioral biases affect the prices, which provide investors with an opportunity to receive higher returns than the market average.
Ways to Implement Tactical Investing in Your Investment Portfolio
Let’s now discuss the ways in which traditional tactical investors attempt to remain one step ahead of the market:
1. Asset Allocation
Asset allocation is very important in the tactical investing process. It is a process of determining the right proportion of assets (such as stocks, bonds and cash) according to the investor’s expectations of the market. Tactical investors are always watching the market and making changes in their asset allocation to reflect the current state of the market.
For example, when the economy is on the rise, you are likely to find that tactical investors are increasing their stock position to ride on the rising market. But when the economy is down they will reduce the stock position and instead buy bonds or even keep cash.
2. Sector Rotation
Another good approach is sector rotation. This is the process of transferring money from one sector of the economy to another depending on which sector is doing well and which is not. The main goal is to invest in sectors which are likely to perform well and avoid those that are likely to perform poorly.
For instance, if a tactical analyst predicts that the technology sector will continue to do well, then he or she will increase investment in technology stocks. On the other hand, if they identify risks in the consumer discretionary sector, they will decrease their investment in that sector.
3. Market Timing
Market timing is one of the most controversial strategies in tactical investing. It is the process of buying and selling securities with the expectation of short-term changes in the market. Even though it is not easy to learn, there are those who trade tactically and can identify the trends and make changes to their portfolio.
For instance, if a tactical analyst thinks the market is going to correct, they will sell some of the stocks to retain cash. On the other hand, if they think that there is a rise in the market, they will increase their stock position.
Case Studies and Statistics
Research has been done on the effectiveness of the tactical investing strategies. A research at the University of California established that tactical asset allocation can provide higher returns than the traditional buy and hold strategy over a period of 20 years. It turns out that tactical investors can get better risk-adjusted returns by managing their portfolio actively.
Also, a case study from a large investment bank found that a tactical sector rotation strategy outperformed the market by investing in winning sectors while avoiding losings over a 10-year period.
Conclusion
Tactical investing is a concept that can be used to gain an edge over the market. Through the dynamic management of portfolios and the periodic adjustment of the portfolio, tactical investors seek to achieve higher returns. Asset allocation, sector rotation, and market timing are some of the most commonly used tools in their arsenal.
However, it should be noted that tactical investing also has its risks. It can be nerve-wracking to make predictions about market movements and even professional traders can get it wrong. Therefore, it is crucial to carry out thorough analysis and have a proper diversification plan when navigating this approach.
In conclusion, tactical investing can be a great strategy for people who want to earn more than the market. If these tactics are used, investors can aim to get higher risk-adjusted returns and navigate through the market dynamics with more confidence.
