Tactical investment strategies refer to making active changes to your asset allocation to take advantage of forecasted market movements. Unlike buy-and-hold strategies, tactical investing relies on market timing to overweight or underweight asset classes. With proper implementation, tactical strategies can enhance portfolio returns. This article provides practical examples and tips on utilizing tactical investment strategies effectively.
Set allocation ranges around a strategic policy
The most common tactical strategy is to set allocation ranges around a portfolio’s strategic policy mix. For example, a strategic benchmark may be 60% stocks, 30% bonds and 10% cash. An investor can establish bands of plus/minus 5-10% to allow for tactical tilts. If positive momentum is expected in equities, the stock allocation can be increased toward the upper end of the range by trimming bonds and cash. Bands prevent drastic bets and anchor the portfolio to its long-term policy.
Use momentum indicators to time entry and exit
Momentum indicators like moving averages or relative strength can identify turning points for tactical shifts. For instance, if a 50-day moving average crosses above a 200-day average, it may signal a new uptrend in which the stock allocation can be increased. Moving averages and other technical indicators provide disciplines, not predictions, for dynamically adjusting allocations.
Rebalance methodically over a time period
Rather than radically shifting asset class exposures all at once, tactical changes can be executed methodically over weeks or months. This smoothing approach takes advantage of market fluctuations to rebalance into assets becoming relatively more attractive. Regular rebalancing also ensures the portfolio does not drift too far from policy targets.
Use derivatives to efficiently adjust exposures
Derivatives like futures and options allow asset exposures to be adjusted quickly and cheaply. For example, equity index futures can be used to rapidly increase or decrease stock exposure versus cash. Options spreads allow asymmetric bets to be structured. Derivatives require advanced knowledge but are powerful tactical tools.
Tactical investment strategies aim to exploit short-term market opportunities through active asset allocation. Setting allocation bands, using momentum signals, rebalancing gradually and employing derivatives are practical examples of tactical techniques investors can use. When implemented prudently, tactical strategies may enhance portfolio returns versus static buy-and-hold policies.