What is Tactical Asset Allocation?

Tactical asset allocation involves changing your allocation frequently.

A man looking into a crystal ball. He could be using tactical asset allocation strategies.
Tactical asset allocation involves tilting your portfolio toward sectors that you think may perform better than average. Raygun / Getty Images

Tactical asset allocation is a more active approach than strategic asset allocation. With tactical asset allocation, rather than following a static allocation and rebalancing on a periodic basis, you choose to overweight or underweight asset classes based on an analytical assessment of the value of the asset.

With tactical asset allocation, you start with a base allocation, such as 60% stocks, 30% bonds, 10% cash, but, with a range of plus or minus ten or twenty percent.

If calculations show that stock valuations are high, you would choose to underweight stocks and your allocation may be 40% stocks, 30% bonds, 30% cash. Or, if stocks seem undervalued, you may move your investment allocation up to 80% stocks with only 20% in bonds and cash.

Is Tactical Allocation Similar to Market Timing?

Some opponents of tactical asset allocation consider it a form of market timing. Market timing, however, is more akin to trying to guess, use technical analysis, or use your "gut feeling" to determine when to get in or out of investments. Most market timing techniques have poor results.

Tactical allocation follows a defined process of “appraising” an asset class based on numerous factors such as price to earnings ratios, price to book ratios, the macro economic outlook, consumer spending, interest rates, and much, much more.

Tactical asset allocation is difficult to do on your own unless you have a great deal of investment expertise and access to a lot of economic data.

A tactical asset allocation fund, or ​a combination of funds, may be a better choice. 

Tactical Allocation Mutual Funds

The primary goal of using a tactical approach is to maximize return potential. Naturally, investments will fluctuate in value. Many times these fluctuations are triggered by a certain event, such as a government action that benefits or is detrimental to a particular company or industry.

In these situations, a tactical fund manager may let high performing investments, or a group of investments within the same market sector (for example, energy stocks during an oil shortage), continue to be a larger portion of the portfolio (due to its already increased value relative to other holdings). When they expect news or a policy to change that would be detrimental to that sector, they would then trim down that part of the portfolio.

The mutual funds who cater to this philosophy will employ more industry and sector analysts to cover major news events such as government policies, elected officials, company leaders, competitive products, and customer preferences.

The fund managers who specialize in this style have to have at least a 10% or greater difference in allocation over a specified benchmark allocation to be considered "tactical."  For example, a large cap fund that thought health care stocks were going to do well would have at least 10% more of the fund assets allocated to health care than a comparable S&P 500 index fund. The time frame involved to make these tactical "bets" may be anywhere from quarterly to a three year period.

Tax Efficiency of Tactical Allocation Strategies

Like any actively managed investment approach, tactical allocation strategies are not going to be very tax-efficient.

Tactical investing involves more frequent investment moves which means the likelihood of more short-term capital gains, which are taxed at a higher tax rate than long-term gains. This is fine if you are using this approach with funds inside of retirement accounts. But if you use tactical strategies in a brokerage account that is not an IRA, expect that you will get a large 1099 tax form with lots of transactions to report each year. This often results in a hefty tax bill.