By Mike Moody
Tactical asset allocation is on the rise. So says a survey from Jefferson National, discussed in a recent article in Financial Planning:
As registered investment advisors and fee-based advisers are challenged by increasing market volatility and declines, they are turning to alternative investment classes and tactical allocation to protect their clients’ portfolios.
Roughly 50% said they have increased their use of alternatives, and 76% believe tactical asset allocation can outperform a passive approach over the long term.
Alternative assets are neither intrinsically good or bad. Typically they increase diversification, but that can also come at the cost of reduced returns. And assets that are uncorrelated now can certainly become correlated later, occasionally with very inconvenient timing.
Tactical asset allocation, if done in a very disciplined fashion, can certainly be beneficial. Whether it outperforms a passive approach, however, can sometimes be dependent on where you are in the market cycle—and how you have constructed your tactical model. A great deal of forethought and experience is required to build a tactical approach that will thrive in a wide range of market environments.
We love tactical asset allocation—we act as sub-advisors for two very successful global allocation funds for Arrow Funds—but the last decade has been very comfortable for anyone with the ability to diversify out of US equities.
Here’s my word of caution: advisors are gravitating toward tactical asset allocation now, maybe partly because it has done well for the last five to ten years. When you choose a core fund for global allocation, think carefully about whether its approach is adaptive enough to handle strong equity markets. True, we haven’t seen that for a while and the way things are going in Europe makes even the possibility seem remote, but that’s often when black swans surprise us.