One of my favorite things during the Christmas season is to decorate my house. When driving down the street, my house tends to be the eye-catching one... think the Griswold house. As we string lights, hum Christmas tunes, and watch my husband crawl around on the roof with his staple gun, we really get into the holiday spirit.
Now, let's put my slightly over-the-top "ode to the holidays" in investment terms. I recently explained that strategic investing, when you pick the mix of stocks, bonds and cash to make up your portfolio, serves as the foundation of your house. Well, I like to think of Tactical Allocation as decorating or changing for the season. Of course, it shouldn’t be as drastic of a transformation as the Griswold’s (we don't want to blow a fuse or catch the tree on fire). Rather, a Tactical Allocation approach provides for overweighting or underweighting asset classes as perceived market opportunities arise. In yard decorating terms, you're not leaving the inflatable Santa out in the yard all year, that would be the traditional investing “buy and hold on for dear life” approach. You're watching conditions and judging when it's the opportune time to deflate old Saint Nick, pack him away and move on to the next holiday. The goal of Tactical Allocation is to reduce risk, increase returns or both.
While we believe that the relationship of valuation between markets over long periods will be efficient and will correspond to fundamentals, we also acknowledge that over shorter periods, some markets may become overvalued, while other asset classes will become undervalued. This is where Tactical Allocation can be considered. A somewhat modified asset allocation can potentially offer better returns and less risk when executed correctly.
A tactical asset allocation strategy can be either flexible or systematic. In a flexible approach an investor modifies his portfolio based on valuations of different markets or sectors (i.e. stock vs. bond markets). Systemic strategies are less discretionary and more model based methods of uncovering market anomalies. Examples of these are trend following or relative strength models.
All of these methods require knowledge, discipline and dedication to execute successfully; it's not like throwing a single strand of lights over a tree branch and calling it festive. And with Tactical Allocation, less can be more, which is an approach I sometimes wonder if I should apply to my Christmas decorations. So, talk to your Financial Planner to determine what may be appropriate to incorporate into your portfolio.
 Keep in mind that all investing involves risk, and there is no assurance that this or any strategy will be profitable nor protect against loss.