An opinionated, yet well-researched analysis of the current state of domestic economic activity and corresponding asset allocation recommendations. Or, how to best position your retirement accounts for their best risk-adjusted performance in the short-term. I suggest two basic accounts for every investor: A market account, which is invested in highly diversified ETFs, mutual funds (both equity and fixed-income), and another that is invested in a highly liquid cash account.
Tactical Asset Allocation Explianed
If you're like most investors, you have a 401k or retirement account filled with a diversified array of mutual funds, likely selected by your financial adviser. You may also have one or two Exchange Traded Funds (ETFs) or maybe some hot stocks you are hoping to generate some "mad money."
You no doubt have suffered major investment losses since last year as your financial adviser didn't have the foresight, or better yet the incentive, to get you into cash before the market tumbled.
Face facts. Investment advisers don't get fees when your accounts are in cash. They get paid commissions to recommend mutual funds and they also get a percentage of assets invested. When was the last time a financial adviser told you: "Hey, I think we should park your assets in a low-yielding money-market account for a while" ? Moreover, the mutual fund managers making the macroeconomic decisions with you money don't have your back either. They want only to match or beat the performance of an equity or bond index. Few are willing to take decisive action to protect assets or deviate from a stated investment strategy.
Tactical asset allocation (TAA) is the wave of the future. Your adviser will tell you that it's nothing more than market timing, which studies have proven time and again cannot be done. They'll tell you strategic asset allocation and sticking with a buy and hold strategy is best. I say TAA is being done and those investment shops with the best and brightest such as Goldman Sachs are doing it quite well ($3 billion in profit last quarter).
What's driving the demand for TAA?
1. Investor discontent with their mutual fund managers'
fees and performance.
2. Investor discontent with Wall Street profitability
at taxpayers' expense
3. The proliferation of ETFs
ETFs allow for a quick and cost-efficient vehicle for tactical asset allocation. Investors don't have to worry about short-term trading penalties associated with mutual funds. There are lower trading commissions (no loads, management fees, etc.) and lower tax implications. And there is a huge and liquid market for these products. A highly diversified portfolio can be created with just these ETFs:
1. S&P 500 SPY
2. US Investment Grade Bonds AGG
3. Treasury Inflation Protected Securities TIP
4. Gold Bullion GLD
5. Emerging Market Index EEM
However, in periods of extreme financial distress even once uncorrelated assets show high correlation. Thus, bonds offered no protection from collapsing equity markets. Everything except cash and Treasuries plummeted. Having a portfolio, or at least a portion of your portfolio invested in ETFs and committed to a tactical asset allocation strategy is your best hope to swiftly react to quick changes in the market environment.
Ask your financial adviser about tactical asset allocation and they'll probably try and sell you another "product." Next . . . Entry and Exit Signs.
You no doubt have suffered major investment losses since last year as your financial adviser didn't have the foresight, or better yet the incentive, to get you into cash before the market tumbled.
Face facts. Investment advisers don't get fees when your accounts are in cash. They get paid commissions to recommend mutual funds and they also get a percentage of assets invested. When was the last time a financial adviser told you: "Hey, I think we should park your assets in a low-yielding money-market account for a while" ? Moreover, the mutual fund managers making the macroeconomic decisions with you money don't have your back either. They want only to match or beat the performance of an equity or bond index. Few are willing to take decisive action to protect assets or deviate from a stated investment strategy.
Tactical asset allocation (TAA) is the wave of the future. Your adviser will tell you that it's nothing more than market timing, which studies have proven time and again cannot be done. They'll tell you strategic asset allocation and sticking with a buy and hold strategy is best. I say TAA is being done and those investment shops with the best and brightest such as Goldman Sachs are doing it quite well ($3 billion in profit last quarter).
What's driving the demand for TAA?
1. Investor discontent with their mutual fund managers'
fees and performance.
2. Investor discontent with Wall Street profitability
at taxpayers' expense
3. The proliferation of ETFs
ETFs allow for a quick and cost-efficient vehicle for tactical asset allocation. Investors don't have to worry about short-term trading penalties associated with mutual funds. There are lower trading commissions (no loads, management fees, etc.) and lower tax implications. And there is a huge and liquid market for these products. A highly diversified portfolio can be created with just these ETFs:
1. S&P 500 SPY
2. US Investment Grade Bonds AGG
3. Treasury Inflation Protected Securities TIP
4. Gold Bullion GLD
5. Emerging Market Index EEM
However, in periods of extreme financial distress even once uncorrelated assets show high correlation. Thus, bonds offered no protection from collapsing equity markets. Everything except cash and Treasuries plummeted. Having a portfolio, or at least a portion of your portfolio invested in ETFs and committed to a tactical asset allocation strategy is your best hope to swiftly react to quick changes in the market environment.
Ask your financial adviser about tactical asset allocation and they'll probably try and sell you another "product." Next . . . Entry and Exit Signs.