Cyclical tactical asset allocation
 | This article may be confusing or unclear to readers. (May 2010) |
Stock price and bond yield movements are connected to changes in the economic environment. The cyclical approach to Tactical asset allocation involves monitoring economic, technical and statistical analysis for patterns that have historically led to trends in stock market movements. These are guidelines that can be followed to ascertain changes in market direction to approximately a 3-6 month level of accuracy. This is very helpful to the investment decision since an exact reversal point is practically impossible to determine. Investment managers can use this information to improve their performance by modifying their strategic asst allocations.
In this way, an investor with an asset mix of stocks and bonds could use the cyclical approach to tactical asset allocation to rebalance their weighting in a favorable manner. For example, the investor could increase the allocation in bonds and decrease the allocation in equities when it is expected that the economy is heading into a recession. Historically, bonds have outperformed stocks in recessionary periods and that would be the reason for this decision.
The following is a performance example to display the value of cyclical tactical asset allocation. Considering a $10,000 portfolio allocated with 10% in T-Bills, 30% in long-term bonds, and 60% in stocks.
From 1961 to 1997:
Without CTAA:
$10,000 -> $459,700
CTAA avoiding worst 3 years for equities:
$10,000 -> $831,300
CTAA avoiding all negative years for equities (extreme and unrealistic, for demonstration only):
$10,000 -> $7,500,000
Thus, the value of Cyclical Tactical Asset Allocation can be very significant to an investment manager.
References
- CSI Global Education Inc. (2007). Investment Management Techniques. Toronto: Canadian Securities Institute. pp. 5–18. ISBN 1-894741-54-4.