TAA strategies can be either discretionary or systematic.
Discretionaryedit
In discretionary tactical asset allocation strategies, an investor modifies his asset allocation according to the valuation of the markets in which they are invested. Thus, someone who invested heavily in stocks might reduce their position when they perceive that other securities, such as bonds, are poised to outperform stocks. Unlike stock picking, in which the investor predicts which individual stocks will perform well, tactical asset allocation involves only judgments of the future return of complete markets or sectors. As such, some practitioners perceive it as a natural supplement to mutual fund investing, including passive management investing.
Systematicedit
Systematic tactical asset allocation strategies use a quantitative investment model to systematically exploit inefficiencies or temporary imbalances in equilibrium values among different asset classes. They are often based on financial market anomalies (inefficiencies) that have occurred in the past and are supported by academic and practitioner research. For example, many systematic TAA strategies try to use quantitative Trend Following or Relative Strength techniques to produce excess returns. These both aim to capitalize on momentum, a well-known market anomaly.
Considerationsedit
The efficient-market hypothesis would imply that tactical asset allocation cannot increase risk-adjusted returns, since markets are already efficiently priced. If a tactical approach were found that could increase returns without an increase in risk, investors would flock to that inefficiency, and the advantage would go away. Many investors do not accept this hypothesis, however, and believe that inefficiencies in the market persist and can be exploited.
Many factors determine the success of a TAA strategy. The investor needs to have the necessary knowledge, practical investment skills, dedication, and discipline to design and/or execute a successful tactical strategy. The specific market anomalies on which the strategy is based may change or disappear in the future. Other factors such as risk tolerance, market timing, portfolio size, investment expenses, etc. may also affect the portfolio performance.
Criticismedit
Investors who utilize the tactical asset allocation strategy generally want to hedge risk in a volatile market. However, Larry Swedroe of CBS MoneyWatch described the strategy as an attempt to time the market, and provides an excuse for managers to increase revenue from trading fees due to the frequent activity the strategy requires.[2][3] In a study conducted by Morningstar, Inc., they examined the "net annualized return, standard deviation, Sharpe ratio, and maximum drawdown from July 31, 2010, to December 31, 2011" of 163 tactical funds.[4] They concluded that only a small percentage of funds outperformed the Vanguard Balanced Index Fund (including PIMCO All Asset Fund and GMO Global Asset Allocation Fund).[4] Updated to June 2013, they found that 20 percent of funds beat the Vanguard Balanced Index Fund, and just four had a better Sharpe ratio.[5]
^"Tactical Asset Allocation – TAA". Investopedia. Retrieved 4 May 2012.
^Jim Baird (December 21, 2009). "Tactical Asset Allocation Offers No Free Lunch". Forbes. Retrieved 4 May 2012.
^Larry Swedroe (March 6, 2012). "Tactical asset allocation – Another ripoff". CBS MoneyWatch. Retrieved 4 May 2012.
^ abJeffrey Ptak (February 2, 2012). (PDF). Morningstar Advisor. Archived from the original on November 27, 2023. Retrieved 4 May 2012.
^"Do tactical allocation funds add value?". CBS News.
Sourcesedit
Faber, Mebane T. and Eric W. Richardson (2009). The Ivy Portfolio: how to invest like the top endowments and avoid bear markets. New York: John Wiley & Sons. p. 133. ISBN978-0-470-28489-6.
Ehrhardt, Michael C.; Wachowicz Jr., John M. (1990). "Tactical Asset Allocation – a tool for the individual investor". Review of Business. Business Research Institute, St.John's University. 12 (3): 9–14. ISSN 0034-6454.
External linksedit
6 Asset Allocation Strategies that Work
Tactical Asset Allocation
Interactive asset allocation toolbox for applying various portfolio construction techniques
February 19, 2024
tactical, asset, allocation, this, article, needs, additional, citations, verification, please, help, improve, this, article, adding, citations, reliable, sources, unsourced, material, challenged, removed, find, sources, news, newspapers, books, scholar, jstor. This article needs additional citations for verification Please help improve this article by adding citations to reliable sources Unsourced material may be challenged and removed Find sources Tactical asset allocation news newspapers books scholar JSTOR May 2012 Learn how and when to remove this template message Tactical asset allocation TAA is a dynamic investment strategy that actively adjusts a portfolio s asset allocation The goal of a TAA strategy is to improve the risk adjusted returns of passive management investing 1 Contents 1 Strategy descriptions 1 1 Discretionary 1 2 Systematic 2 Considerations 3 Criticism 4 See also 5 References 6 Sources 7 External linksStrategy descriptions editTAA strategies can be either discretionary or systematic Discretionary edit In discretionary tactical asset allocation strategies an investor modifies his asset allocation according to the valuation of the markets in which they are invested Thus someone who invested heavily in stocks might reduce their position when they perceive that other securities such as bonds are poised to outperform stocks Unlike stock picking in which the investor predicts which individual stocks will perform well tactical asset allocation involves only judgments of the future return of complete markets or sectors As such some practitioners perceive it as a natural supplement to mutual fund investing including passive management investing Systematic edit Systematic tactical asset allocation strategies use a quantitative investment model to systematically exploit inefficiencies or temporary imbalances in equilibrium values among different asset classes They are often based on financial market anomalies inefficiencies that have occurred in the past and are supported by academic and practitioner research For example many systematic TAA strategies try to use quantitative Trend Following or Relative Strength techniques to produce excess returns These both aim to capitalize on momentum a well known market anomaly Considerations editThe efficient market hypothesis would imply that tactical asset allocation cannot increase risk adjusted returns since markets are already efficiently priced If a tactical approach were found that could increase returns without an increase in risk investors would flock to that inefficiency and the advantage would go away Many investors do not accept this hypothesis however and believe that inefficiencies in the market persist and can be exploited Many factors determine the success of a TAA strategy The investor needs to have the necessary knowledge practical investment skills dedication and discipline to design and or execute a successful tactical strategy The specific market anomalies on which the strategy is based may change or disappear in the future Other factors such as risk tolerance market timing portfolio size investment expenses etc may also affect the portfolio performance Criticism editInvestors who utilize the tactical asset allocation strategy generally want to hedge risk in a volatile market However Larry Swedroe of CBS MoneyWatch described the strategy as an attempt to time the market and provides an excuse for managers to increase revenue from trading fees due to the frequent activity the strategy requires 2 3 In a study conducted by Morningstar Inc they examined the net annualized return standard deviation Sharpe ratio and maximum drawdown from July 31 2010 to December 31 2011 of 163 tactical funds 4 They concluded that only a small percentage of funds outperformed the Vanguard Balanced Index Fund including PIMCO All Asset Fund and GMO Global Asset Allocation Fund 4 Updated to June 2013 they found that 20 percent of funds beat the Vanguard Balanced Index Fund and just four had a better Sharpe ratio 5 See also editCyclical tactical asset allocation Global tactical asset allocation Financial risk management Investment managementReferences edit Tactical Asset Allocation TAA Investopedia Retrieved 4 May 2012 Jim Baird December 21 2009 Tactical Asset Allocation Offers No Free Lunch Forbes Retrieved 4 May 2012 Larry Swedroe March 6 2012 Tactical asset allocation Another ripoff CBS MoneyWatch Retrieved 4 May 2012 a b Jeffrey Ptak February 2 2012 In Practice Tactical Funds Miss Their Chance PDF Morningstar Advisor Archived from the original on November 27 2023 Retrieved 4 May 2012 Do tactical allocation funds add value CBS News Sources editFaber Mebane T and Eric W Richardson 2009 The Ivy Portfolio how to invest like the top endowments and avoid bear markets New York John Wiley amp Sons p 133 ISBN 978 0 470 28489 6 Bogle John C 1999 Common Sense on Mutual Funds New York John Wiley amp Sons p 66 ISBN 0 471 39228 6 Ehrhardt Michael C Wachowicz Jr John M 1990 Tactical Asset Allocation a tool for the individual investor Review of Business Business Research Institute St John s University 12 3 9 14 ISSN 0034 6454 External links edit6 Asset Allocation Strategies that Work Tactical Asset Allocation Interactive asset allocation toolbox for applying various portfolio construction techniques Retrieved from https en wikipedia org w index php title Tactical asset allocation amp oldid 1187331226, wikipedia, wiki, book, books, library,
