Tactical Asset Allocation

Tactical asset allocation starts from a long-term strategic mix and then makes deliberate, temporary adjustments. If an investor believes shares are likely to outperform bonds over the next year, they might increase shares from their usual 60% to 65%. When the opportunity passes, they return to the target.

The adjustments are usually kept within set limits, such as five or ten percentage points either side of the target, so the portfolio never moves too far from its long-term plan.

For example, a fund with a strategic target of 50% shares and 50% bonds might move to 55% shares if its managers expect strong economic growth, or to 45% if they expect a recession.

Tactical asset allocation depends on making accurate forecasts, which is difficult. Wrong calls can reduce returns, and frequent trading adds costs and may trigger taxes. Some investors use it actively, while others prefer to stick to their strategic allocation and simply rebalance regularly.