Tactical asset allocation is a more active approach than strategic asset allocation. With tactical asset allocation, rather than following a static allocation and rebalancing on a periodic basis, you choose to overweight or underweight asset classes based on an analytical assessment of the value of the asset.
With tactical asset allocation you start with a base allocation, such as 60% stocks/30% bonds/10% cash, but with a range of plus or minus ten or twenty percent. If calculations show that stock valuations are high, you would choose to underweight stocks and your allocation may be at 40% stocks/30% bonds/30% cash. Or, if stocks seem undervalued you may be up to 80% stocks with only 20% in bonds and cash.
Opponents of tactical asset allocation consider it a form of market timing. Market timing, however, is more akin to trying to guess, use technical analysis, or use your "gut feeling" to determine when to get in or out of investments. Most market timing techniques have poor results.
Tactical allocation follows a defined process of “appraising” an asset class based on numerous factors such as price to earnings ratios, price to book ratios, the macro economic outlook, consumer spending, interest rates, and much, much more.
Tactical asset allocation is difficult to do unless you have a great deal of investment expertise. A tactical asset allocation fund, or combination of funds, may be a better choice. This CBS MoneyWatch article explains how tactical allocation funds work, and offers six fund choices.
