Updated August 18, 2023

Tactical Asset Allocation vs. Strategic Asset Allocation: What Investors Must Consider

Are you a trader like hedge-fund-legend Paul Tudor Jones or a buy-and-holder like Warren Buffett? Maybe a mix of both depending on the circumstance?

Investing often comes down to your time horizon. Some market participants are short-term traders while others stick with long-term planning. Tactical asset allocation is an investment approach whereby you have a relatively near-term outlook and are looking to capitalize on a singular or macro viewpoint – whether it be about a stock, bond, commodity, currency, or type of crypto. Strategic asset allocation, on the other hand, takes a long-term approach, often targeting specific portfolio weights to a variety of sub-asset classes. 

Both ways can work, but every position you have should have its own plan. The last thing you want is for a near-term trade to work against you, and then have it turn into a long-term losing investment. By knowing the ins and outs of tactical and strategic asset allocation, you can have more control over your portfolio and financial future.

What Is Tactical Asset Allocation?

We’ll start zoomed in with tactical asset allocation and then broaden our scope to assess popular strategic asset allocations. Tactical asset allocation is active investing that adjusts to changing markets and single-stock conditions. Alongside its near-term nature, traders commonly apply certain rules so that they have pre-defined risk and return percentages before a tactical play is put on. 

The objective is to earn outsized returns in a narrow time window and then move on to the next trade. But not all tactical asset allocation decisions are trades – you might apply an investment thesis using a broad secular macro theme, such as elevated inflation over the coming several months or few years, and allocate capital around that narrative.

Let’s run through a scenario where tactical decision-making is the name of the game. Suppose you see a stronger economy ahead but with higher interest rates, perhaps due to optimism that growth is returning to favor after a recession. You hold a 20% fixed-income stake most times composed of 10% in junk bonds and 10% in investment-grade credit. Well, a tactical asset allocation choice that might fancy your taste would be to go all-in with 20% of your bond allocation to lower-duration, lower-rated speculative corporate bonds rather than longer-duration, stronger-quality issues. 

That aggressive deviation from your norm would benefit in such a bullish environment. Then, once your thesis has played out, you can revert to your long-term target allocation percentages.

Are you more of a stock trader, though? If so, you can apply the same active approach outlined in the fixed income example above to equities. How’s this for a bullish scenario: You forecast the Fed to unexpectedly turn dovish by slashing interest rates over the coming months. So long as the economy is in decent shape, that more accommodative policy should mean a bullish risk-on trading environment. Hence, you do some homework and identify a handful of low-quality, high-beta glamour stocks for a near-term long trade. 

The tactical play here is to benefit from money moving into cyclical names that will outperform steady-eddy blue-chip companies. If your call is right, and the Fed turns dovish, your trades would be winners, then you can eventually retreat the portfolio’s risk back to the strategic asset allocation. A key point here is that your tactical outlook and execution should be based on independent analysis (away from the consensus). 

What’s ideal about a tactical asset allocation approach is that you have the chance to outpace the market’s return through active management. Via short- and medium-term trading, you have greater control of how your money is invested, and profits (and losses) are usually outsized compared to a buy-and-hold approach. It’s generally recommended that more experienced and aggressive market participants engage in tactical portfolio decisions. 

What Is Strategic Asset Allocation?

Strategic asset allocation is a portfolio management process in which you construct, monitor, and maintain an investment mix suited to your long-term goals based on risk and return objectives. It's based on your capital market assumptions over years and decades. Young investors might look to be all-in on stocks while those nearing or in retirement would devote a portion of their strategic allocation to lower-risk bonds.

A hallmark of strategic asset allocation is sticking to a plan, commonly through setting a fixed percentage of capital to broad asset classes and sub-asset classes. For instance, you might elect to hold 80% in global stocks and 10% global bonds, 5% cash, and 5% in alternatives (commodities, private equity, hedge funds, crypto, etc.). Risk-averse investors might tone down their equity exposure and go with the common 60/40 portfolio (60% stocks, 40% bonds). In general, the younger you are, the more so-called “human capital” you have, so investing more heavily in growth assets like stocks makes sense. A strategic asset allocation often changes over time, gradually turning less aggressive as you age.

Strategic asset allocation usually involves owning a mix of styles, sectors, and market cap sizes that have been time-tested to earn reasonable rates of return, while not looking to beat the market over short intervals. The actual percentages of stocks and bonds are based on your personal preferences after careful consideration of your ability, willingness, and need to take risk to earn high enough returns over the long haul. 

Comparing the Two: Portfolio Implications

A key thing to recognize is that you don’t have to focus exclusively on either tactical or strategic portfolio management. Both can be done simultaneously, and many active investors are known to have long-term holdings while aiming to profit from a near-term view. 

For example, you might own a few stocks in the Information Technology sector, like Apple or Microsoft, with unrealized profits but have a bearish outlook on the sector over the coming months. Rather than sell your positions and realize a tax hit from capital gains, you can elect to place a tactical wager on a move down in the broad index through an ETF. Think of it like a hedge. While you hold on to your strategic asset allocation through the individual equities, you have layered on a tactical short play based on an analysis of market conditions.

So, which is better? Tactical or strategic asset allocation? Once again, there is no right or wrong here. It’s all about your timeframe (as active investors are wont to say.) If you want to weave in and out of the market and individual stocks, then a tactical approach that pounces on perceived opportunities could be right for you. If you prefer to be more hands-off, then simply setting a target strategic asset allocation using a handful of ETFs and then rebalancing back to those percentages could fit the bill for you. Or you can simply make deliberate and dynamic short-term deviations from your strategic plan with tactical asset allocation.

One more thing: taxes. It's a touchy subject, and you’ll want to always be cognizant of the accounts you perform short-term trades since those gains may be taxed at higher rates when done outside of a tax-sheltered account. Still, you should never let the “tax tail” wag the “investment dog” - some traders make the mistake of holding on to a winner too long just to avoid a tax bill. Frame paying taxes as a consequence of earning investment profits, not a tragedy. 

A Macro Strategy Solution

What’s great is that you can have both a strategic allocation with tactical views expressed through a global macro investment approach. At Allio, our team of hedge fund veterans constantly analyzes all markets so that we can pounce on opportunities presented while also sticking with tried-and-true portfolio methods. We use full-scale optimization that can take advantage of changing risk and return projections across asset classes. We allocate using both traditional investments and alternatives such as real estate, emerging markets, crypto, and precious metals.

The Bottom Line

Tactical asset allocation and strategic portfolio management are both embraced at Allio. Our automated portfolios can help you invest like a pro whether you are new or have decades of experience. Our all-in-one saving and investing app makes building your net worth easy so you can hit your goals.

Ready for your own global macro investment portfolio? Head to the app store and download Allio today!