When building an investment portfolio, choosing between a strategic vs. tactical asset allocation is a big decision. But which is right for your investments? The answer depends on your unique financial situation and goals. And understanding the difference is useful for your investment strategy. Here’s a breakdown and comparison of strategic vs. tactical asset allocation.
A financial advisor can help you create a financial plan for your investment needs and goals.
What Is a Strategic Asset Allocation?
With this approach, you won’t be chasing trends to time the market. Instead, the goal is to create and maintain a portfolio with an appropriate mix of assets to reach your goals. Of course, the appropriate mix of assets will vary widely based on your unique investment goals and risk tolerance.
A common strategic asset allocation includes a 60/40 portfolio. In this asset allocation strategy, you would have 60% of your assets in stocks and 40% in bonds.
No matter the mix of assets, you’ll choose a strategy that you want to stick to for the long-term. So, if the market goes up and down, you don’t plan to make adjustments to your strategy along the way. But you may rework your strategy if your risk tolerance changes.
Beyond a portfolio with asset allocations that include a long-term outlook, a strategic asset allocation also requires rebalancing to maintain the strategy. Without regular rebalancing, it is all too easy for the target asset allocations to move away from your goals.
What Is a Tactical Asset Allocation?
In contrast, a tactical asset allocation strategy takes a more active approach that responds to changing market conditions. Although you may have a long-term strategy in place, you regularly make changes along the way for short-term returns.
With a tactical asset allocation, your goal is to maximize your portfolio’s performance. Instead of sticking to a long-term strategy, a tactical asset allocation means that you will make changes to your portfolio based on the market conditions.
When pursuing a tactical asset allocation, chasing down great market deals takes a lot more time and effort than a strategic asset allocation. Additionally, the cost of more regular trading could cut into your returns.
Strategic vs. Tactical Asset Allocation
The right asset allocation varies based on your goals. Plus, you’ll need to consider the amount of time tied to each strategy. Let’s break down who is best suited for a strategic asset allocation:
- New investors that want to set up a relatively passive approach
- Buy and hold investors who want their portfolio to grow with the market
- Young investors with plenty of time to recover from any downturns
- New investors seeking a relatively simple way to diversify
- Investors that know sticking to a plan is important
A strategic asset allocation can help you stick to a long-term investment plan. And that’s a big deal. Without a plan in place, many investors are prone to making emotional decisions with the market sees a big dip.
The unfortunate reality is that the stock market has inherent volatility. And with that, investors should be prepared to see big swings throughout their long investment horizon. By setting up a strategic asset allocation upfront, it can be easier to stick to a long-term plan.
Now, let’s compare who is best suited for tactical asset allocation:
- Experienced investors that have the time and energy to monitor and act on market trends
- Investors seeking to maximize their portfolio returns
- Experienced investors with in-depth market knowledge
- Investors seeking portfolio flexibility
Keeping up with a tactical asset allocation isn’t the right move for a hands-off investor. But if you have the time and inclination to seek out opportunities for portfolio growth, a tactical strategy can be a good idea.
Bottom Line
When building a portfolio, the right asset allocation is important. The choice between a strategic vs tactical asset allocation should be straightforward. You either want to stick to a predetermined plan based on your risk tolerance or have the flexibility to make changes based on the market conditions.
Tips for Investment Planning
- Consider working with a qualified financial advisor to map out the best investment strategy. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you want to see how your investments could grow, check out our investment calculator.
Photo credit: ©iStock.com/SDI Productions, ©iStock.com/Tempura, ©iStock.com/andresr