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Tactical Asset Allocation and Market Timing: What's the Difference?

January 11, 2011

by Nancy Opiela

Sonnenberg noted that advisors wishing to underscore the difference between market timing and tactical moves may consider sharing the research that drives their decisions with clients. Fortigent makes its analysis of macroeconomic factors, fundamentals and valuations at the regional and asset-class levels, technical and liquidity measures, and broad market risks available in both executive summaries and detailed reports. “Advisors report positive feedback when they share this information with clients,” Sonnenberg said.

Lou Stanasolovich, CEO and President of Legend Financial Advisors, Inc., in Pittsburgh, Pennsylvania, agreed that educating clients is crucial to increasing their comfort with tactical portfolio decisions. Accordingly, he has begun recording securities-market overviews that he emails to clients. “Our clients enjoy hearing from me,” he noted. “Next week we’ll begin liquidating some traditional bonds and moving to some more non-traditional vehicles that offer stability in a rising interest rate markets. I’ll describe to clients how we’ll probably double our position in bank loans and invest in a fund that goes long/short on Treasuries and a bond fund that long/shorts currency. I want them to understand the tactical shift and our expectations.”

In addition to discussing how he makes tactical portfolio decisions, Alan Galinsky, founder of the Arch Financial Group in Boca Raton, Florida, is careful to construct the “big picture” for his clients so they appreciate the necessity of portfolio changes. “There are very few people look at next 100 years in the US economy and think it will look very much like the last 100 years,” he said. “To adjust for that, we need to get clients on board with the fact that tactical changes are necessary now and will continue to be needed in the future. Once the US was the dominant force in manufacturing and consuming, but the middle class is exploding elsewhere.” Growth in emerging markets like Brazil is unbelievable, he said, and “we have an obligation to adjust for this in our portfolios.”

As two devastating bear markets in the space of a decade increase the pressure on strategic asset allocators to reduce risk and boost returns, the question of how market timing differs from tactical asset allocation will persist for advisors and clients. 

“In the eight years since we began our transition to tactical management, we’ve gone from the bottom of the market, back to the top, and back down to the bottom, and tactical management has been a much more proactive and effective way to manage risk,” concludes Kitces.  “Clients have gradually accepted our view that shifting a portfolio in response to market valuation extremes does not constitute evil market timing, but is a prudent and constructive response supported by market fundamentals.”

Nancy Opiela is a Boston-based freelance writer.