Tactical Asset Allocation (TAA)

What is ‘Tactical Asset Allocation – TAA’

Tactical asset allocation is an active management portfolio strategy that shifts the percentage of assets held in various categories to take advantage of market pricing anomalies or strong market sectors.

Explaining ‘Tactical Asset Allocation – TAA’

To understand tactical asset allocation, one must first understand strategic asset allocation. During the process of creating an investor policy statement (IPS), factors such as required rate of return, acceptable risk levels, legal and liquidity requirements, taxes, time horizon and unique circumstances are analyzed to settle on a strategic mix of assets to include in an investor’s portfolio. The percentage that each asset class is weighted over the long term is known as the strategic asset allocation. This is the mix of assets and weights that will help an investor reach their specific goals.

The Usefulness of Tactical Asset Allocation

Tactical asset allocation is the process of taking an active stance on the strategic asset allocation itself and adjusting these long-term target weights for a short period of time to capitalize on market or economic opportunities. For example, assume that data suggests that there will be a very large increase in demand for commodities over the next 18 months. It may be prudent for an investor to shift more capital into that asset class to take advantage of the opportunity. While the above portfolio’s strategic allocation will remain the same, the tactical allocation may then become:

Further Reading