When investors try every little tweak to attempt to catch the market, then they are market timers. It may be nice for brokers when they generate transaction activity, but if they overdo it they will drive clients away.  Maybe a third of the new clients I meet have switched because of transaction activity that was too high.

Tactical Asset Allocation is when something gets out of whack in a pronounced way and on a relative basis, and we take advantage of the opportunity. 

For example, financial stocks have fallen.  Through yesterday, on a year-to-date basis, they are down 27%.  Since October 9, they are down 41%.  At the sector level, we then apply three tests to gauge the opportunity.  First, we look at the fundamentals.  In the case of financials, these are still under pressure as institutions continue to de-lever.  Then we look at value.  We’d like to say there is a green light for financials, but nobody knows for sure what their earnings will be, so really it is a yellow light.  Lastly, we look at the psychological factors.  At big turning points, such as the dot com bubble, psychology can be 60% or more of the driver behind price movements. 

An example of good Tactical “Unless you have a better reason, yearly rebalancing is the prudent thing.  I have listened to David Swensen (the manager of the Yale endowment) and he agrees.“Asset Allocation was immediately after the crash of 1987.  The Yale endowment called an emergency meeting and determined that nothing was “broken.”  The fundamental factors that affect market valuations were unchanged.  So they put a ton of money into stocks, and did very well.

Unless you have a better reason, yearly rebalancing is the prudent thing.  I have listened to David Swensen (the manager of the Yale endowment) and he agrees.   But if something gets way out of whack such as, say, interest rates spiking to 8%, then maybe both bonds and stocks would be worthy of a tactical move.  We want to be judicious and appropriate, and not rushing to catch every little swing. 

If gold fell to 600 or 700, we would put some additional money in that asset class, in a tactical sense.  But we already have a tactical allocation to gold.

The most recent tactical allocation we did was on July 23, immediately after a number of financials announced slightly better than expected earnings.  We put a couple of percent back into stocks.

We have been taught that market timing can only be done by those who watch the market every minute, like George Soros or Michael Steinhart.  Most advisors should not try to market time; it is too hard.  When things bottom out, the $3.8 trillion that is sitting in cash right now will move in and have a big impact.

In April the market was up 5%, and in May it was up 1%.  We considered getting back on board, but decided this was a bear market trap.  We did not see the preconditions I noted at the beginning of this interview, which are necessary to put you in a better investment frame of mind.

There are several big picture themes that should influence everyone’s investing decisions. These are related to the environment, water, alternative energy, raising living standards in the emerging markets, and the maturation of the Boomer generation.

First, people all over world are much more aware of the environment and issues like global warming.  Related to this, I believe water presents an excellent opportunity [see our article on this topic].  There are five ways to approach water-related investing.  I believe bottled water and utilities do not present opportunities as attractive as water issues exposed to filtration, purification, and desalination.

Whoever is elected President will need to move toward alternative energy.  Solar and wind have gotten a lot of hype, so my advice is to be careful there.  There will also be opportunities related to off-shore drilling.

The next big issue is the rising living standards among the two billion people living in emerging markets.  For example, a big issue, which was “For example, a big issue, which was overlooked by most of the world, was the election on March 22 of Ma Ying-jeou as President of Taiwan. He is our friend and, more importantly, a friend and not a foe of China.”overlooked by most of the world, was the election on March 22 of Ma Ying-jeou as President of Taiwan. He is our friend and, more importantly, a friend and not a foe of China.  This will make Taiwan’s reserves more investible.  Taiwan has 2.5% the population of China, but 25% of the reserves. It will improve travel and strengthen northeast Asia.  It also affects Korea, especially if that peninsula slowly reconciles.  It may make Japan want to invest more in China (Japan is already one of the biggest investors in China).  People forget that 30% of China’s economy is consumption; the other 70% is exports.  This will help the consumption piece. 

This could be as big as the Berlin Wall coming down - what I would call a “Kissinger moment.”  The impact of the fall of the Berlin Wall was the opening of new markets, and the same can happen here.  In fact, while celebrating the opening of the Olympics, we should also be celebrating the 30th anniversary of Deng Xiaoping ascending to leadership in China and tilting the whole country to capitalism.

There are big picture opportunities to serve the Boomer generation.  They want to feel, look stay young, but they don’t want to pay.  Generic drugs have a long term opportunity.  There are also opportunities in pet care (Boomers want companionship) and dental services.

I read Alan Greenspan’s book, The Age of Turbulence. Many people dismissed it as the kiss-and-tell musings of the former Fed chairman.  But they missed so much.  The most chilling part is that Greenspan said that 55 of the 76 million members of the Boomer generation are responsible for their own retirement investing.  But they don’t know it.  They get statements but don’t realize they are responsible for their asset allocation.  I am really concerned about this.  A Wharton study of 1.2 million defined contribution plan members showed that 92% have not made a change in their asset allocation in several years. 

As individual investors and advisors, the only things we have to level the playing field are our common sense and basic observation skills.  We need to keep our eyes open, read, and listen - with skepticism – and have an advisor we can trust (which I refer to in my book as an “Uncle Frank”).