Tactical Asset Allocation Begins With Effective Portfolio Management
Tactical Asset Allocation Begins With Effective Portfolio Management

Tactical Asset Allocation Begins With Effective Portfolio Management

Tactical Asset Allocation

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. A little bit of the right information can go a long way in improving your odds of success.  Thus, you need to have a game plan before you start throwing money into the markets.  In general, 85%-90% of investors lose their money; this must occur for the remaining 10-15% to make a killing. For every dollar won, someone has to lose a dollar.

Portfolio Management Strategy 

  1. Divide your money into equal lots and deploy the same amount of money into each position. Always maintain some cash for those mouth-watering opportunities that come along every now and then. Generally, when the markets are trading in the slightly overbought ranges, low to medium-risk investors should move 25% into cash.  This section discusses how to determine when a market is trading in slightly overbought ranges.
  2.  Decide how much you want to make in advance. Every subscriber should determine profit targets for at least 33% of any given position (preferably 50%), and one should never deviate from this target. For example, setting a profit target of 45%. Hence any time a position shows a gain of 45% or more, profits on at least 1/3rd of the position should be taken.  This money can be put aside for new opportunities when they present themselves.
  3.  Decide how much you are willing to lose also; do not just focus on the rosy picture.  You must also focus on what you will do if things do not work out as planned.  We generally advocate a stop that ranges from 20%-30%, with the average being 25%. However, we don’t usually issue a stop until all the funds to a given position our used up.
  4. When your stop is hit exit, exit the position. Do not consider adjusting the stops because you hope or think the position will miraculously come to life. Hope is for fools.
  5.  If the play is not working out, i.e. not doing anything for months, this is dead money. You have to make a decision to stay in or sell and buy something else. If you have plenty of cash, then you can sit it out, but if your funds are limited, you might be better off investing in another play.
  6.  Make sure the goals you set are realistic.
  7.  Do not get into options until you understand that market well, unless you are selling cash secured puts or covered calls.

Technical Analysis can be helpful if applied properly

Learn basic TA; the learning centre covers many aspects of trading, plus provides valuable lessons on technical analysis and other information that we believe will serve investors in general well. Find two or three technical indicators that appeal to you and once you understand how they work, customize the settings.

Keep at it, and don’t just give up. Investing is a skill, and it can only get better with time; you must be willing to put in the necessary effort. As they say, “you need to be in it to win it”.

Do not follow the crowd.

The masses always panic and are always driven by emotion. Emotions drive the markets; if you understand this, then you understand that the only way to win is by not allowing your emotions to do the talking. Instead, focus on what emotion is driving the masses; once you identify the emotion, you can identify the trend. Once the trend is known, winning the stock market investing game becomes infinitely easier.  An investor can focus on identifying the best stocks to own if the trend is up and vice versa. Stock market crashes should be viewed through a bullish lens as they are nothing but long-term buying opportunities.

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

Random Thoughts on Tactical Asset Allocation

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 as a moderately active strategy since managers return to the portfolio’s original strategic asset mix when desired short-term profits are achieved.

The Usefulness of Tactical Asset Allocation

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 and financial advisors who choose to invest in using 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


Leave a Reply