Ronald J. Surz is the President of PPCA, Inc (www.PPCA-Inc.com), an RIA in San Clemente, CA, providing manager due diligence technologies, and enhanced UMA platforms.| Are You Confused By "Tactical" Versus "Strategic" Asset Allocation? I Am |
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| Tuesday, July 24, 2012 20:54 |
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It’s time that we started using more meaningful and appropriate words to describe asset allocation. I recommend we replace the words “Tactical” and “Strategic” with “Variable” and “Static.” “Variable” asset allocation structures should be further classified as “Scheduled,” like target date glide paths, or “Reactive,” like market timing.
“Tactical” is currently used to mean “Variable.” Its dictionary definition is “made or carried out with only a limited or immediate end in view.” “Strategic” is currently used to mean “Static.” Its definition is “identification of long-term or overall aims and interests and the means of achieving them.”
Not all Variable asset allocations are Tactical. Target date fund glide paths are Variable because of long-term or overall aims and interests and the means of achieving them. TDFs are Scheduled Variable, whereas market timing is Reactive Variable. For a fun interactive example of Scheduled Variable asset allocation, please visit Target Date Allocation.
The terms “Tactical” and “Strategic” have bugged me for years. “Static” and “Variable” are better descriptions.
Who else besides me would like to see us move to these better descriptions? Comments (13)...
pretty lame explanation; we need some extended commentary on this w/ examples from actual portfolios.
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July 26, 2012
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Sorry for the confusion. "Tactical" is the word used to convey a static investment policy, like 60/40 stocks / bonds."Strategic" has been used to mean "Stocks are tanking so I'm getting out now." Some want to make the distinction between "Strategic" and "Timing", where they say "Strategic" is identifying current mispricings that are likely to correct in the future, whereas "Timing" is crystal ball stuff. Now that I'm writing this, it reminds me of my original premise -- this is way too confusing. "Strategic" vs "Timing" is a distinction without a difference. "Timing" vs "Scheduled", like a target date glide path, is an important distinction.
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July 26, 2012
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Ron, quit confusing people. If they learned this and your style indexes, due diligence then the result would be doing it right.
Why waste time to learn if you only want to do what everyone else does?
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July 26, 2012
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Hi Ron,
I think you have it backwards A strategic allocation is the core portfolio conveyed in client's IPS. The tactical allocation is the active bet you are making on current market trends.
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July 26, 2012
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Of course. I got it wrong again. Those 2 words just mean the same to me, but I guess it's just me.
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July 26, 2012
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@ Nick - how does one have a allocation in the IPS and then make tactical decisions?
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July 26, 2012
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@Nick - Great question.
I have seen IPS's that simply provide for broad ranges for asset classes. I.e., Equities 30-65%, that seemingly give the manager (adviser?) discretion within those ranges. Normally, these kinds of IPS's don't make specific reference to the concept of rebalancing. I don't believe I have ever seen one like this, however, that provides for the criteria to be used for making these tactical decisions. Fundamentals, momentum, Ouija board, etc.
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July 27, 2012
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@stvnrsmth
Thanks for comment re IPS; I concur. We are making commentary on a subject that author is confused about and doesn't understand. We don't need to rename the concept of tactical and strategic. They just have to be learned and understood.
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July 27, 2012
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How rude. I understand insult and resent it "stnvrsmth."
It seems to me that you are confused and don't understand, so let me try again. The words we've been using mean almost the same thing. Why "learn" confusing words when better words could be used instead?
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July 27, 2012
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Civility, please! If you care enough to comment on A4A about what someone posts -- agree or disagree -- it means their opinion matters to you. Treat them that way. Thanks for your passion, and please keep it constructive.
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July 27, 2012
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@Nick I would say, I doubt Ron is confused as those with the academic credentials and understanding pay great creed to his work.
We have to consider if the IPS template as practice works. I suggests it does not. The current template is set to maintain the maximum risk a client is willing to take, so there needs to be a better method/process. However, folks have a knee jerk reaction when someone suggests that rebalancing back to the allocation first deployed years ago on a annual or quarterly basis is nonsensical. The step being missed is whether at the point of rebalancing, does the model allocation still meet the investor's goal? While such a method is unavailable to brokers and dually registered advisors (FINRA compliance), it is an option for RIA firms. A method that examines is the current allocation the optimal solution to achieve the goal (annualized return) at the highest consistency and lowest risk? Today's environment is a perfect example. In order to achieve an 8% return, the investor must take significantly more downside risk than 5 years ago. Ron is suggesting that this approach be considered 'variable,' as opposed to tactical because tactical as you stated seems to imply 'a bet.' I have shared information on our methodology, Target Return Investing, that by Ron's definition employs a variable approach. Shoot me an email @ This e-mail address is being protected from spambots. You need JavaScript enabled to view it if you want to see it to better understand the perspective of Ron. B
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July 31, 2012
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