Tactical Asset Allocation (TAA)

What Is Tactical Asset Allocation (TAA)?

Tactical Asset Allocation (TAA) is an investment style in which the primary classes of assets like stocks, bonds, and cash are actively balanced and adjusted. 

Generally, TAA adds value or reduces risk relative to a buy-and-hold strategy.

TAA aims to maximize portfolio returns while keeping market risk to a minimum. 

The changes you make in a tactical asset allocation are based on market conditions.

How Does TAA Work?

Having TAA, you may come with a cautious mix of assets suitable for your risk tolerance and objectives. 

For instance, a moderate portfolio allocation that you may choose may have a target of 30% bonds, 65% stocks, and cash for 5%.

The idea of what makes a tactical is that there will be changes in the allocation, depending on the prevailing market and economic conditions. 

The allocation to a specific asset can be either neutral-weighted, under-weighted, or over-weighted, depending on these conditions and your objectives.

Types of Tactical Asset Allocation

There are two types of Tactical Asset Allocation- discretionary and systematic.

Discretionary TAA

With discretionary TAA, adjustments will be made by the investor in an asset allocation based on the market valuations of the changes in the same market as the investment. 

For instance, an investor with substantial stock holdings may wish to decrease these holdings if bonds are likely to outperform stocks for a period. 

Tactical asset allocation includes judgments on whole markets or sectors.

Systematic TAA

In contrast with the discretionary TAA, the systematic TAA utilizes a quantitative investment model to use inefficiencies or temporary balances between different classes of assets. 

These moves use a basis of known financial market anomalies or inefficiencies, assisted by academic and practitioner research.

Tactical Asset Allocation vs Strategic Asset Allocation

Strategic asset allocation is a long-term investment plan that is used as a framework to construct portfolios. 

A strategic asset allocation will mostly stay the same, if at all, over time.

TAA, on the other hand, aims to take advantage of market conditions and may result in more frequent changes to your portfolio.

What Does TAA Mean for Individual Investors?

Individuals who choose to invest using TAA are likely to concur with the modern portfolio theory, which significantly expresses that asset allocation has a more significant impact on portfolio returns and market risk than investment selection.

For individual investors, TAA may mean higher returns and lower risk over the long term. 

For instance, it may show that you are incredibly managing your portfolio if you have 20 stocks consistently outperforming S&P 500 index funds.

Why Use Tactical Asset Allocation (TAA)?

Several reasons why you should use TAA include:

Increasing Returns

TAA shifting the asset allocation to stronger performers may increase the portfolio return. 

Doing so lets the portfolio capture the upside in an asset class while simultaneously moving away from inadequately performing asset classes.

Adapting to Market Conditions

TAA is flexible and responds to macroeconomic events. 

The stocks significantly underperformed several other asset classes during the stock market in 2000 and 2008. 

A TAA strategy shifts the asset allocation properly to account for macroeconomic conditions.

Lowering Risk

TAA lowers the risk of a portfolio by managing asset allocation. 

There will be greater returns that can be realized with lower risk through diversification with TAA.

Final Thoughts

Tactical asset allocation is called an investment strategy that attempts to produce higher returns and reduce risk relative to a buy-and-hold strategy by making active decisions about asset allocation.

While there is no guarantee that TAA will outperform a buy-and-hold strategy, it may be a good choice for investors eager to take on more risk to achieve higher returns.

FAQs 

1. What is tactical asset allocation?

Tactical asset allocation is called an investment strategy that attempts to produce higher returns and reduce risk relative to a buy-and-hold strategy by making active decisions about asset allocation.

2. How to use funds for TAA?

There are many ways to use funds for TAA. You can use exchange-traded funds (ETFs), mutual funds, or even individual stocks and bonds.

3. What is the difference between TAA and strategic asset allocation?

Strategic asset allocation is a long-term investment plan that's used as a framework to construct portfolios. A strategic asset allocation will mostly stay the same, if at all, over time. TAA, on the other hand, aims to take advantage of market conditions and may result in more frequent changes to your portfolio.

4. What does TAA mean for individual investors?

Individuals who choose to invest using TAA are likely to concur with the modern portfolio theory, which significantly expresses that asset allocation has a more significant impact on portfolio returns and market risk than investment selection.

5. Why should I use TAA?

Using TAA may increase returns, adapt to market conditions, and lower risk.