Tactical Allocation – Where to invest when no place seems safe…

by JR Robinson on October 9, 2013

Two prolonged 50% peak-to-trough market declines since 2000 and a host of lingering global macro-economic worries have left legions of investors understandably jittery.  A consequence, however, is that jitters lead people to pull their investments out of long term investments in favor of cash whenever there is a hiccup in the markets.  Such market timing behavior has long been known to be detrimental to wealth building and capital preservation.

So what is a Nervous Nellie to do (and, btw, there is no shame in being one)?  Tactical allocation (often also referred to as “global allocation”) mutual funds may be an investment option worth considering.  In contrast to traditional mutual funds, which are often narrowly restricted by their prospectuses to being fully invested in a narrow segment of the market place (e.g., small cap U.S. stocks, international large cap stocks, etc.), tactical fund prospectuses typically grant the fund managers a high degree of investment flexibility.  This freedom to “go anywhere” means that the portfolio managers have the ability to change asset classes (both aggressively and defensively) as they believe the economic conditions warrant it.

The merits of tactical allocation as an investment strategy are still being debated in research circles.  On one side, some research suggests that tactical allocation strategies underperform relative to passively managed index funds.  Anecdotally, however, there are a number of well known tactical funds that have successfully ameliorated downside risk during the two aforementioned major market declines.  From the financial planner’s perspective, I submit that the value of tactical allocation funds does not necessarily lie in their ability to outperform traditional stock market indices, but rather in their ability to help the Nervous Nellies of the world feel comfortable investing (and staying invested) through the treacherous financial times in which we live.  For information, including prospectuses, on the tactical allocation funds that I am comfortable including in client portfolios, please do not hesitate to contact me.

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