Tactical Asset Allocation: Master Portfolio Strategy

Tactical Asset Allocation: Master Portfolio Strategy

Tactical Asset Allocation

by Sol Palha, Lead analyst at Tactical Investor

Tactical Asset Allocation; Portfolio strategy is key to success.

Most investors fail to grasp the significance of portfolio management and foolishly focus on tactical asset allocation instead. Without an effective portfolio management strategy, Tactical Asset allocation is virtually useless. Tactical Asset allocation is part of portfolio management, but we are referring to a plan on when to bank profits and to decide how much of a loss you can take upfront.  It is easier to bank profits, but in many cases, investors have no game plan in place when it comes to dealing with losses.

In many cases, they will hold onto a losing position allowing a slight loss to snowball into a massive loss. Hope is for fools when it comes to the market. There is no room for emotional investors; only the astute investor with a game plan and who can handle losses as quickly as he handles a win will walk away with the bulk of the profits. The masses are doomed to lose, for they do the same thing repeatedly: buy when they should sell and sell when they should be buying.

Investing, in general, is akin to Gambling.

At least as far as the uninformed or novice investor is concerned.  However, this does not need to be the case. Our goal is to challenge the misconceptions surrounding novice investing while highlighting the significance of being equipped with the right knowledge before venturing into the markets. The staggering statistic of 85-90% of investors losing money serves as a reminder of the importance of having a sound strategy in place to increase your chances of success. By approaching investing with a well-informed mindset, you can elevate yourself above the masses and potentially realize substantial returns.

Portfolio Management Strategy 

  • Safeguard your investment portfolio by dividing funds into equal portions.
  • Maintain a portion of your funds in cash for potential opportunities.
  • When the markets are overbought, consider moving 25% of low to medium-risk investments into cash.
  • Establish your profit targets in advance,  for at least  33% of your holdings and then slowly move this figure up to 50%. Once a position has reached the established profit target, take profits on at least one-third of the investment.
  • Set aside the profits for future investment opportunities
  • Establish a stop loss level, in the range of  20%-30%, but it should be an end-of-day stop. The market should close below that level to trigger it. Exit a position when the stop loss is triggered. Do not adjust stops based on hope or speculation.
  • Regularly assess your positions and consider selling if they are not generating returns.
  • Set realistic investment goals.
  • Avoid options trading until you have a thorough understanding of the market.

By following these principles, you can effectively manage your investment portfolio and increase your chances of success.

Technical Analysis can be helpful if applied properly

If you’re looking to improve your chances of success in investing, it’s important to have a solid understanding of technical analysis. Utilize resources in the learning centre that cover various aspects of trading, including technical analysis and other valuable information. Take the time to study and familiarize yourself with two or three technical indicators that appeal to you, and once you understand how they work, customize the settings to fit your specific needs. However, it’s important to keep in mind that investing is a learned skill, and can only get better with time. As the saying goes, “you need to be in it to win it.” Put in the necessary effort and don’t give up. With persistence and determination, you’ll be well on your way to refining your technical analysis skills and becoming a more successful investor.  As they say, “you need to be in it to win it”.

Do not follow the crowd.

In the stock market, it is crucial to understand that the masses are driven by emotions. The market is moved by emotions, so it’s essential to keep your emotions in check and focus on the emotions driving the masses. This way, you can identify the trend and make investment decisions accordingly. For example, if the trend is up, you can focus on finding the best stocks to invest in. It’s important to remember that stock market crashes should be seen as long-term buying opportunities and not be feared. By approaching the market with a bullish lens and keeping your emotions in check, you increase your chances of success in the stock market.

Don’t ever follow the crowds or what is popular; if it’s too popular, it usually means the end is near.

Smart Investing: The Tactical Asset Allocation Approach

Tactical asset allocation is an active management portfolio strategy that shifts the percentage of assets held in various categories to take advantage of market pricing anomalies or strong market sectors.

This strategy allows portfolio managers to create extra value by taking advantage of certain situations in the marketplace. It is a moderately active strategy since managers return to the portfolio’s original strategic asset mix when desired short-term profits are achieved.

Put in another way

Tactical asset allocation is the process of taking an active stance on the strategic asset allocation itself and adjusting these long-term target weights for a short period of time to capitalize on the market or economic opportunities. For example, assume that data suggests that there will be a very large increase in demand for commodities over the next 18 months. It may be prudent for an investor to shift more capital into that asset class to take advantage of the opportunity. Full Story

Investors that focus on tactical asset allocation are looking at the “big picture.”

They likely subscribe to the Modern Portfolio Theory, which essentially states that asset allocation has a greater impact on portfolio returns and market risk than individual investment selection.

You don’t need to be a statistician to understand the basic premise behind tactical asset allocation. Imagine a fundamental investor who has done a good job of research and analysis. Perhaps they have a portfolio of 20 stocks that have consistently matched or out-performed S&P 500 index funds for three consecutive years. This would be good, right?
To answer the question, consider this scenario: During the three year period from the beginning of 1997 through the end of 1999, many investors found it easy to out-perform the S&P 500. However, during the 10-year period from January 2000 through December 2009, even a solid portfolio of stocks would have had roughly a 0.00% return and would have been out-performed by even the most conservative mix of stocks, bonds, and cash.  Full

Tactical Asset Allocation is a strategy that involves active portfolio management.

This isn’t about buying specific asset classes in specific quantities and then holding. Instead, you rebalance the percentages of assets held in different categories so that you can take advantage of current market conditions.

For the most part, though, TAA isn’t considered completely active. When you create your investment portfolio you decide on your base asset allocation. You set up your desired percentages for each asset class. However, if the market experiences an anomaly, or if conditions change for the short term, the asset allocation is changed. Tactical advantage is used in order to maximize profits, as well as limit losses. Once the desired short-term effect is achieved and the markets settle down a bit, the original asset allocation can be returned to.

TAA is about dynamic portfolio management and requires that you pay attention to what is happening so that you can change your asset allocation to take advantage of current conditions. For example, if stocks are dropping, and offering a good bargain, it might be worth it to shift to more stocks in order to buy when valuations are low. That way, you get more bang for your buck. Later, as valuations increase, you can shift your asset allocation, selling for profits since you bought while prices were low.

The idea is to switch your asset allocation when conditions indicate that one asset might soon outperform another. Rather than focusing on picking particular investments, the idea is to focus on an entire asset class or sector at one time. TAA works well when you understand how asset classes relate to each other, and how they generally move in response to market stresses. When you have this understanding, you are more effective in shifting your asset allocation to take advantage of the current circumstances. Full Story

Other articles of interest:

Avoid These Common Stock Investment mistakes

Technical Analysis

Why Mechanical and Technical Analysis Systems Fail

The Limitations of Trend Lines

Contrarian Investment Guidelines

Inductive Versus Deductive reasoning

Portfolio Management Suggestions

Ultimate Timing Indicator

Esoteric Cycles

A clear Illustration of the Mass Mindset In Action

Mass Psychology Introduction

comic strip Illustrating mass psychology in action


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