Perspectives on Tactical Asset Allocation

What Comes Next?

It is not about pace, it’s about direction

It is our belief that the set of investment opportunities and risks is changing. This development is not related to the pace of change, but instead concerns the direction of change. We view this to be a pretty big deal.

We don’t have a crystal ball, no one does. We can’t identify the winners and losers in advance. Nor can we determine future market turning points, market-timers always fail.

But we can say quite a bit about the drivers that will determine the future paths taken by investment markets and national economies over the next so many years. Why do we say over “so many years”? Do we mean over the short-run or over the long-run? Actually, neither. Instead, it’s our understanding that this directional change (for investment opportunities/risks) will continue for whatever number of years (short or long) is required for the driving factors to become adequately reflected.


Time – Can Be Your Best Friend

Matching a need – with an investment portfolio

I’ve determined how much I plan to spend (and gift) during years 10 through 15 (in the future). To support this plan, my portfolio will be invested for 12 ½ years (on average), the midpoint of this interval.

Many would suggest that an appropriate and common-sense asset mix would be 50% stocks and 50% bonds given this investment time horizon. No, not necessarily today, given current market valuations, but certainly as a normal average asset mix when one’s investing for 12 ½ years.


Sometimes People Just Don’t Fact-Check

Some have falsely claimed that market cycles are getting shorter

Tactical Asset Allocation (TAA) relies on trending or momentum for its success. Some have falsely claimed that market cycles are getting shorter, and therefore TAA no longer has the inherent advantage that it once did. Let’s fact-check this claim in order to determine its truth or falsehood.


Which Portfolio is Lower Risk?

We care most about risk when the sky is falling

When the market is going up, we don’t care about risk. But when it’s collapsing, we do. Since 1920, there have been nine stock bear markets. Let’s compare how four hypothetical portfolios performed during these nine traumatic events.


But Has TAA Worked Better Than Bonds?

Is TAA versus bonds the right comparison?

Probably not. But to answer this question, we must first identify the all-important investment timeframe. I’m assuming here that the investor is targeting needs arriving between 5 and 20 years in the future. Therefore, their investment holding period or time horizon is 5 to 20 years.


What Happens When Interest Rates Rise?

How does TAA perform during rising/falling interest rate environments?

To answer this question, we must:
• Identify a time period to examine,
• Specify how we define rising and falling interest rate environments,
• Identify a simple transparent TAA portfolio that anyone could replicate, and
• Provide comparative passive index benchmarks.


Why Doesn’t BlackRock Offer TAA?

If TAA is so good, then why doesn’t everyone offer it?

First off, BlackRock, Nationwide, Invesco, and Fidelity all offer TAA products. Nevertheless, the investment industry widely appreciates that TAA is not commercially viable, i.e., it won’t sell well. How do we understand this seeming contradiction? As we explore this question, keep in mind the distinction between a product selling well in a commercial setting . . . and that same product being the best possible investment solution for an individual investor. The two have little if any overlap. Let’s begin.


A Pretty Good Outcome

Let’s try a thought experiment – What if . . .

What if we build a passive portfolio from the 32 asset categories shown in the graphic below using the following weighs: 30.3% US stocks, 29.3% international stocks, 5.0% US Treasury bonds, 31.5% US investment grade corporate bonds, 1.4% international bonds, 1.3% gold, and 1.2% other commodities. Over the last 102 years (ending 1/31/2021) this portfolio would have delivered 11.53% per annum. That’s pretty good.