I suspect that from the title, you’re instinctively thinking, “Tactical? Strategic? They’re synonyms, Kyle! How can they be different?” Fair question, and I’m glad you asked. We, as advisors, need to provide clarity and education to these seemingly obtuse concepts. With that said, let me shine a light on the difference between Tactical & Strategic investing, and the importance of being invested in a strategy that meets your objectives and comfort level for risk.
- A long-term asset allocation mix is selected based upon your risk tolerance level (for example: 60% stocks and 40% bonds for moderate risk or 100% stocks for aggressive risk). As the percentage of your portfolio invested in each category changes due to return differences between investments, the portfolio is rebalanced back to its intended target.
- Passive, index-tracking funds are used throughout the portfolio.
- The funds are low-cost. (a.k.a. minimal expense ratio).
- The portfolio is typically invested in Equities (stocks) and Fixed Income (bonds) for which there is a well-established market index.
- Turnover in holdings is low.
The primary objectives of a strategic portfolio are to reduce overall underlying costs (those pesky expense ratios) and mitigate unnecessary risk.
- Flexible ranges are selected within your risk level for the asset allocation mix between stocks, bonds, and alternative investments. Adjustments are made based upon your advisors view of opportunities, risks, interest rates and values.
- Passive, index-tracking funds are used as the portfolios core, but there is a freedom to make tactical – additional return seeking – investment changes:
- Tactical shifts in investment category weightings.
- Add Alternative Assets (example: energy or real estate specific funds).
- Utilize actively managed funds or funds seeking to provide excess returns above a passive index.
- Portfolio costs will generally rise due to these tactical movements.
- Turnover in holdings is higher than you would experience with a Strategic portfolio.
The primary objectives of a tactical portfolio are to stay anchored to the core but search for better returns by owning higher risk assets or actively managed funds. Keep in mind, portfolio costs rise by adding these concentrated, riskier assets and due to a higher level of turnover in holdings. Greater risk/return assets = higher cost.
Why is it important for you to be invested correctly?
The simple answer is we want you to achieve your objectives! The financial goals you have, as an Investor, along with your planning strategy is what drives the decisions behind how you should be invested. Both the planning strategy and the investment strategy need to work in harmony and towards a common objective – to help make you reach your financial goals. You can do it. We can help!