Wealth Clarity Blog

You have likely heard that 80%+ of portfolio returns come from asset allocation strategy or the way you diversify your investment assets.

So, naturally, lots of wealth managers spend a great deal of time carefully considering how to allocate portfolios for the “long-run.”  That kind of strategic thinking is important and if it’s done well then a portfolio has a greater potential to achieve its objectives over time.  However, we learned over the difficult past 18 months that long-term thinking did not eliminate volatility and preserve capital.

But, no one said that “strategic asset allocation” only applied to the long-run (3-5 years).  Tactical, or short-run (3-6 months), thinking provides the opportunity to respond to news and a changing market environments.  The tactical approach lets investors stay flexible and gives them a chance to verify that their initial thoughts on the market are playing out as expected and make the necessary adjustments that can enhance the outcome.

Being successful requires striking a balance between strategic (long-run) and tactical (short-term) thinking.  Both are valid, and both serve the needs and objectives of the portfolio.  The strategy provides an anchor so the tactics don’t stray too far or get taken to an extreme where they may be viewed as market timing; meanwhile the tactics help to take advantage of immediate, forward-looking opportunities that the strategy might miss completely because it tends to be focused on historical data.

The financial markets may be in a period of increased volatility without any clarity of information.  This can be a very difficult environment to stay locked into a static, long-term strategic allocation.

Key insight:  combine strategy and tactics for better results.

It’s the same 80%+,  and it takes more skill and focus, but the time required can be worth it.  The skill necessary to provide tactical insights will prove to differentiate wealth management firms in the future.