Tactical Allocation for Tough Markets

Today’s economy may be booming and the markets rising (with some bumps here and there), but that doesn’t mean investors do not face challenges. Balancing growth with risk is always a concern, especially as you near retirement. Where can you turn for help?

According to traditional investing wisdom, the solution is diversification. Holding investments from different asset classes, including equities, bonds, and cash, allows you to increase your chances of obtaining a compelling total return.

Some diversification strategies are passive, meaning they buy and hold securities for the long term regardless of market fluctuations. A mutual fund, for example, may have a prescribed allocation mix of 60 percent equity, 30 percent bonds, and 10 percent alternatives. This would not change, even as the equity market rallies and the fixed-income market flounders.

Other diversification strategies are active, meaning they adjust to evolving market conditions by moving assets as the markets change. Portfolio managers using strategies such as these may have the flexibility to shift entire asset classes in response to market fluctuations, for example. If alternatives perform badly, the portfolio manager may exit alternatives altogether. These are also called tactical allocation strategies.

Advocates of tactical allocation strategies believe these strategies may benefit investors in volatile markets. When market risk is low, a portfolio manager can increase exposure to growth by allocating assets to the market’s top-performing sectors and countries; when market risk is high, the portfolio manager can preserve capital by shifting to bonds and cash.

Does it work? No investing strategy is appropriate for every investor. You have to find the one that balances your desire for growth with your tolerance for risk.

We can provide you with more information about what might be suitable for you given your individual financial circumstances, goals, and risk tolerance; please reach out to us for more information.