Tactical investment management refers to actively adjusting asset allocation to take advantage of short-term market opportunities. It is different from strategic investment management which focuses on long-term asset allocation based on risk tolerance. A tactical investment strategy example would be overweighting stocks during market downturns with the expectation of an upward reversion. Tactical strategies require frequently monitoring market conditions, having a process to determine entry and exit points, managing extra transaction costs, and maintaining a strategic allocation benchmark.
Market timing to exploit short-term opportunities
A common tactical strategy is market timing, which aims to overweight asset classes expected to outperform in the near future. For example, increasing equity allocation after a market correction with the expectation that stock prices tend to revert upwards to the mean. Strict rules on when to shift allocations are needed to implement market timing strategies.
Use quantitative models and indicators
Tactical strategies rely on analysis of quantitative indicators to determine market entry and exit points. Examples include tracking Treasury yield spreads, using momentum indicators, and analyzing technical patterns in price charts. Quantitative models help construct rules-based methodologies.
Account for higher transaction costs
Frequent asset allocation changes with tactical strategies lead to higher portfolio turnover and transaction costs. Accounting for short-term capital gains taxes is also important. Extra costs should be weighed against additional returns from market timing.
Maintain a strategic allocation benchmark
While pursuing tactical opportunities, investors must determine an appropriate strategic allocation benchmark based on long-term return objectives and risk tolerance. Tactical allocations are imposed as tilts around the strategic benchmark to not deviate too far from core asset allocation.
In summary, tactical investment management focuses on actively shifting asset class exposure to generate excess returns from short-term market opportunities. Key aspects include market timing models, accounting for higher costs, and maintaining an anchor strategic allocation. When executed in a disciplined, cost-effective manner, tactical strategies can improve portfolio returns.