Retirement Plan Investing Strategic vs. Tactical Asset Allocation

Strategic asset allocation consists of setting target allocations among various asset classes (or individual assets) and periodically rebalancing the portfolio back to those target allocations. This is necessary as investment returns force the holdings in a portfolio to drift away from their targets over time. There are no set rules for the timing of these rebalances. This is much like a buy-and-hold strategy in which the investor seeks market returns in line with their risk tolerance — of course, as an investor’s risk tolerance, goals for the portfolio or life circumstances change, the target allocations may also change over time.

Tactical asset allocation, on the other hand, is a more dynamic approach for managing a portfolio. This approach allows for a percentage range for each asset class (or individual asset) and the ability to make short term, tactical allocation decisions based on market movements and expectations. The goal of such a strategy is to improve the returns of a portfolio over a simple buy-and-hold strategy. For example, a moderate investor may allow their percentage allocated to equities to be between 40% and 60%. If market conditions are favorable, the investor will opt to increase their weight in equities and scale it back to the low end if conditions warrant.

This flexibility adds a component of market timing to a portfolio in an effort to benefit from strength or weaknesses in any particular asset class. This strategy requires more discipline and research, as an investor must first recognize an opportunity in the marketplace, have the processes in place to act on that opportunity and then rebalance the portfolio so the asset classes are back to their original weights. Transaction costs and tax implications should be considered carefully before employing a tactical asset allocation strategy.