Tactical Asset Allocation
Tactical asset allocation (TAA) and dynamic asset allocation (DAA) strategies have attracted renewed interest in recent years as investors have endured one of the worst and most volatile markets in history. The interest in such approaches seems appropriate. Many investors are wondering whether much of the pain suffered in the recent market declines could have been avoided through preemptive asset allocation moves.
The approaches seem to have great appeal. The idea of selling overvalued assets and buying undervalued assets in anticipation of generating superior returns seems intuitive.
If investors engage in TAA strategies, those strategies become another source of investment risk. Before adding such risk, several issues must be addressed:
TACTICAL VERSUS STRATEGIC ASSET ALLOCATION
The distinction between TAA and strategic asset allocation (SAA) is important. Each serves different purposes, usually involves different decision makers, and requires different levels of skill and experience. The process of undertaking the SAA is covered in Chapter 5. The role of the SAA is summarized below.