This article was produced on 17th February 2025 

Key takeaways: 

• Tactical asset allocation involves active adjustments to a portfolio in an effort to capitalise upon investment opportunities and market inefficiencies. 

• This strategy seeks to maximise portfolio returns and aims to mitigate risk during periods of heightened market volatility by leveraging the performances of different assets at different points across the economic cycle. 

• There is great difficulty in trying to time the market, and it also means investors need to have the emotional mindset to make frequent decisions, while compromising on flexibility with tax affairs. 

• The overall success of a tactical asset allocation strategy will depend on an investor’s ability to accurately forecast market trends in a timely, non-emotive fashion, however, risk mitigation measures can be used to limit the downside of such an approach. 

• As always past performance is not an indicator of future performance, and you should also undertake your own research.    

While investors may have become accustomed to strong returns from the stock market over recent years, it is well documented that past performance is no indicator of future performance. What’s more, the market can always turn at any point.  

However, it is generally accepted that over time, the market tends to rise. Short-term volatility can sometimes give rise to investing opportunities for astute investors. 

The investment strategy known as tactical asset allocation is one way to ensure that a portfolio remains adaptive to prevailing market conditions. 

What is Tactical Asset Allocation? 

In short, tactical asset allocation relies on active adjustment of portfolio weightings to capitalise upon opportunistic movements in financial markets. The central premise behind this strategy is that different assets perform differently to one another through the economic cycle. 

Furthermore, it is a reactive approach that offers a great deal of flexibility, as opposed to the more rigid approach that comes with strategic asset allocation, which involves fixed portfolio allocations.  

In an environment where market conditions change, tactical asset allocation allows investors to make decisions that seek to take advantage of any inherent inefficiencies that may arise. While this may be done with the intent to maximise returns, it can also provide diversification benefits. 

Tactical asset allocation applies at an asset level, such that investors look to shift the weight of their capital in assets like local shares, international stocks, bonds, cash, and other assets. Typically, events that might prompt such adjustments include broader factors like market indicators, macroeconomic forces, geopolitical risks, or valuation shifts. 

How might Tactical Asset Allocation be beneficial? 

For starters, tactical asset allocation focuses on managing risk. A key consideration to this strategy and the changes to a portfolio include reducing one’s exposure to an asset class that might be during a downturn, to try to mitigate potential losses. 

This is a form of diversification, which investors can learn more about here. 

Meanwhile, because tactical asset allocation is designed with the intention to respond to evolving circumstances or events, it may be a strategy to realise greater returns during periods where volatility increases more than usual. 

Finally, although tactical asset allocation seeks to mitigate risk, there is also a dual objective insofar as trying to boost returns. In this respect, the strategy targets short-term market inefficiencies and harnesses an active approach to outperform a passive strategy, where investors might be inclined to hold or maintain their existing asset allocations. 

What are the risks of Tactical Asset Allocation? 

Although tactical asset allocation might be beneficial under certain circumstances, and to investors whose goals and objectives are aligned with such an approach, it does come with some risks. The key risk is the fact that this investment strategy relies on trying to time market movements.  

Tactical asset allocation relies on decision making, which means investors must be sure they can control their emotions with respect to decisions that could impact the returns of their portfolios. As such, the strategy is most suited to experienced investors, especially those who have previously invested through market downturns and periods of volatility.  

Tactical adjustments to a portfolio 

For investors to replicate a tactical asset allocation strategy, there are various approaches. 

In the simplest form, investors can deploy this strategy, at least in part, with the aid of exchange-traded funds (ETFs) that rely on active management.  

Alternatively, investment decisions can be undertaken on a discretionary basis, whereby things like broader market research, fundamental analysis and share valuations, technical analysis, and economic trends (e.g. inflation, GDP, interest rates) can shape selection and asset rebalancing. 

Investors may also wish to consider a hybrid approach. Here, the core part of a portfolio follows a strategic asset allocation approach, largely centred on fixed asset choices and weightings. At the same time, a portion of the portfolio’s capital is invested in assets that are subject to tactical allocation adjustments. 

Regardless of which approach one adopts under tactical asset allocation, investors should pay close attention to risk management strategies. As this approach focuses on agility and responsiveness, mitigation measures include diversification, conditional orders such as stop-loss orders, and for advanced traders, the use of derivatives.

Making use of Tactical Asset Allocation 

As a dynamic investment strategy, tactical asset allocation aims to maximise returns through a responsive approach to changing market conditions. As it relies on diversification across asset classes, this strategy also aims to mitigate risk, making it useful during periods of heightened market volatility. 

Nonetheless, trying to time the market offers no guarantee that it will lead to improved returns, and in fact, could prove less successful than a buy-and-hold strategy.  

In addition, tactical asset allocation relies on level-headed decision making across a greater frequency of trades and entails less control with respect to tax events associated with the timing of said trades. 

Whether investors opt for a hands-off approach with ETFs, a discretionary approach, or a hybrid approach, risk mitigation measures may aid this investment strategy to ensure it is effective to capitalise on opportunities and navigate the market cycle.