TACTICAL? Yes PRACTICAL?  Maybe
 
"Wise Men Say, Only Fools Rush In" - Elvis Presley
 
 
Remember when you were a kid, and you told your parents you did something because your friends were doing it?  At least once in your life, your parents probably responded with "just because everyone is doing it, that doesn't make it right."  Then they muttered something about "if your friends jumped off the Brooklyn Bridge..." 
 
Wall Street is often a copycat business.  Someone comes up with a decent strategic idea for investment portfolios, and it works for a while.  Then, all of a sudden, many other firms start doing something similar, or something that seems similar.  Two results typically occur:
 

1. It turns out that the original idea was helpful during certain market conditions, which helps the "early-adopters."  Meanwhile, the "Johnny-come-lately" types only enjoy the tail-end of the success.  Market conditions eventually change and the idea, while still useful, is not practical as a core strategy.
   
2. Clients get discouraged because their advisors always seem to be one step behind, and they get caught up with the "herd."  And the herd never wins for long.  Some of the most well-known investor sentiment indicators have shown over time that buying high and selling low, instead of the reverse, is way too fashionable.
    
   

We see signs that this is happening again.  This time the hot topic is "tactical asset allocation" (or TAA).  
 
Website businessdictionary.com defines the word "tactical" as "involving or pertaining to actions, ends, or means that are immediate or short-term in duration, and/or lesser in importance or magnitude, than those of a strategy or a larger purpose."  So, it follows that TAA is a way to invest for short-term gains in market areas that you don't plan to invest in for the long-term...it's not trading but it's not your main focus, either.  Despite this, many have tried and failed to achieve good long-term results relying solely on tactical strategies (see: hedge fund business - implosion). 
 
That definition above notes that tactical business strategies are short-term but also that they are less important than the overall strategy.  They are more of a "role player" in your portfolio.  Their role may be more important during some periods (e.g.: treacherous markets).
 
Tactical strategies have been around for a long time, and we have used them in moderation across our portfolio work.  They were particularly helpful in 2008 and early 2009, when the stock market's plunge rewarded those who refrained from "buy and hold" strategies.  With investors still stinging from the events of last year, it's not surprising that financial advisors and product producers are filling the air with talk of "you have to do this tactical asset allocation thing" or something of that sort.  Capital preservation is sexy today, and jumping around the markets to profit here, then there, then somewhere else is always sexy to investors.  There is only one problem - in the vast majority of cases, the success is not sustainable on a wide scale. 
 
So, our message to you in this issue of GreenThought$ is simply this: Tactical Asset Allocation is best used as a tool within a larger portfolio, not as a long-term strategic commitment.  That is how we view our use of TAA at Emerald.  It can help reduce the volatility of returns, but if you rely too heavily on it, you may just miss the bull market that forms while you are still responding to the last bear market.  Fighting the last war is not a strategy for success. 
 
Or, as an industry peer has said, people always want to own what they wish they had owned last year.  Need a reminder?  Did you own a tech-heavy portfolio in 1999?  Did you own commodity-related investments last spring?  Many investors ran to these then-popular spots, realizing later that they arrived just before the party ended.  This is investor emotion at its finest!
 
This begs the question: is TAA about to revert to its true role as a tool and not a total portfolio strategy, or is the rash of new tactical investment products (including the dreaded leveraged Exchange-Traded Funds (ETFs) a sign that TAA is the next "hot-dot?" It is starting to look like the latter.    Our response; "bull markets smell like this."  When risk-avoidance is the hot idea, it is time to start thinking about how to position for the next bull cycle.  We are doing so gradually and subtly within our portfolios, though the dawn of a major bull market is still a ways away.
 
Bottom line: we prefer to focus more of our energies on an investment process that we believe can be applied continuously and sustain itself through all parts of the market cycle.  Tactical work is a part of that, but it is more of a side dish than main course.
 
In our judgment, long-term opportunities are presenting themselves across all of our disciplines, but after a strong run up in stocks in a short period of time, we are pumping the break, not hitting the accelerator.  We will have more on that, and its implications for investors, in the next issue of GreenThought$.
 
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