When building an investment portfolio, choosing between a strategic vs. tactical asset allocation is a big decision. But which is right for your investments? The answer depends on your unique financial situation and goals. And understanding the difference is useful for your investment strategy. Here's a breakdown and comparison of strategic vs. tactical asset allocation.
A financial advisor can help you create a financial plan for your investment needs and goals.
What Is a Strategic Asset Allocation?
With this approach, you won't be chasing trends to time the market. Instead, the goal is to create and maintain a portfolio with an appropriate mix of assets to reach your goals. Of course, the appropriate mix of assets will vary widely based on your unique investment goals and risk tolerance.
A common strategic asset allocation includes a 60/40 portfolio. In this asset allocation strategy, you would have 60% of your assets in stocks and 40% in bonds.
No matter the mix of assets, you'll choose a strategy that you want to stick to for the long-term. So, if the market goes up and down, you don't plan to make adjustments to your strategy along the way. But you may rework your strategy if your risk tolerance changes.
Beyond a portfolio with asset allocations that include a long-term outlook, a strategic asset allocation also requires rebalancing to maintain the strategy. Without regular rebalancing, it is all too easy for the target asset allocations to move away from your goals.
What Is a Tactical Asset Allocation?
In contrast, a tactical asset allocation strategy takes a more active approach that responds to changing market conditions. Although you may have a long-term strategy in place, you regularly make changes along the way for short-term returns.
With a tactical asset allocation, your goal is to maximize your portfolio's performance. Instead of sticking to a long-term strategy, a tactical asset allocation means that you will make changes to your portfolio based on the market conditions.
When pursuing a tactical asset allocation, chasing down great market deals takes a lot more time and effort than a strategic asset allocation. Additionally, the cost of more regular trading could cut into your returns.
Strategic vs. Tactical Asset Allocation
The right asset allocation varies based on your goals. Plus, you'll need to consider the amount of time tied to each strategy. Let's break down who is best suited for a strategic asset allocation:
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New investors that want to set up a relatively passive approach
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Buy and hold investors who want their portfolio to grow with the market
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Young investors with plenty of time to recover from any downturns
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New investors seeking a relatively simple way to diversify
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Investors that know sticking to a plan is important