Timing the Stock Market with Tactical Asset Allocation

Tactical asset allocation was born out of the idea to find the best times to buy and sell assets like stock.

The aim is to focus more on assets that are expected to perform well in the near future and avoid the ones that are said to perform weakly. You can start executing a tactical asset allocation strategy through an HTS solution.

Let us learn more about it through this article.

Let’s Talk About Timing the Market

Market timing involves a set of predictive methods so that you are able to move money in and out of a financial market. It can also involve switching funds between asset classes like stocks and bonds.

While a buy-and-hold strategy is where you buy securities and hold them for a longer period of time, investors predict the volatility of the market to earn profits in market timing. You can learn to time the market through HTS solutions and futures options HTS.

What is Tactical Asset Allocation?

Tactical asset allocation is a portfolio strategy that re-balances holdings to make use of short-term opportunities. You keep an eye on market trends and find favorable opportunities that offer the best returns on investment.

Tactical Asset Allocation shifts the percentage of stocks into different categories to let you take advantage of market prices and strengths.

Thereby, you are able to create extra value by making use of particular situations in the marketplace. This active management portfolio strategy is only moderately active since portfolio managers aim for short-term profits. After attaining them, they move back to their original asset mix.

You can try out a TAA strategy using an ideal Futures Options HTS solution to see what it is all about.

The Benefit of Tactical Asset Allocation

1. Capitalise on Economic Opportunities

Tactical asset allocation helps you capitalize on market opportunities for a short period of time. For example, imagine that there is information about an increase in the demand for stocks over a particular period of time.

It is wise for you as a portfolio manager to invest more capital into that asset class to pounce on that specific economic opportunity.

Tactical asset allocation can also happen within a particular asset class.

If the outlook for small-cap stocks does not seem ideal, it is a better choice to shift the allocation within the asset class of stocks to a higher percentage of large-cap stocks for a short period of time.

2. Mitigates Risk

The value of a portfolio can get affected negatively due to wrong decisions regarding stock selection.

We have already discussed how tactical asset allocation helps mitigate risk by capturing the right opportunities and avoiding the risky ones.

Tactical decisions are also useful at times of changing market cycles.

3. Manage Volatility

Market volatility is something tactical moves can help manage. It is influenced by rising interest rates, inflation, etc. against which tactical asset allocation protects you.

Interestingly, volatility is not always an unfavorable condition. It creates favorable opportunities and allows you to enhance risk-adjusted returns using TAA strategies.

You will be able to face the market rise and fall using tactical asset allocation.

Cons of Tactical Asset Allocation

Tactical asset allocation is often compared to strategic asset allocation.

While the tactical asset allocation approach looks at earning higher returns on short-term investments, strategic asset allocation leans more towards the buy-and-hold approach that looks to earn long-term returns.

While strategic asset allocation makes use of historical data to make decisions, tactical asset allocation depends on the particular investment environment at that time.

The main con of tactical asset allocation is that you need to do more work compared to strategic asset allocation.
The latter requires you to re-balance your portfolio perhaps once a year only. The former on the other hand needs you to be more alert to the market trends to be able to quickly spot and make use of opportunities.

With the right HTS solution and enough information on TAA, you will be able to knit a favorable strategy.

TAA Strategies

Tactical asset allocation strategies help you adjust the mix of assets according to market conditions and volatility.

Let us take a look at the most commonly used TAA strategies.

1. Momentum-based TAA Strategies

Momentum-based strategies can be used to work with price trends. They are the best option for the average investor, as they are easy to understand as well as implement.

It helps you reduce exposure to risk but at the same time, false signals can lead to weak performances over the medium term.

2. Value-based TAA Strategies

As the name suggests, such strategies use value metrics to allocate investments to undervalued markets.

Value-based TAA strategies can also be combined with momentum-based strategies to get optimum returns.

3. Cyclical TAA Strategies

Cyclical tactical asset allocation strategies involve a scoring system to see the market cycle stage at a particular time. The mix of assets then moves to the asset classes that are predicted to outperform during that market cycle stage.

You can approach an HTS solution provider to choose and execute the right TAA strategy.

Conclusion

Tactical asset allocation is all about investing to get the best reward for the risks you’re taking. It is not just about avoiding risks but also about capturing the right opportunities.

Instead of predicting the performance of individual companies, Tactical allocation is done at a broader level.

Economic factors like global growth rates, different market sectors and the valuations across them, market sentiment, etc, are some factors that affect tactical decisions.

TAA strategies are great to boost short-term returns. But it requires timing the market well, in order to capitalize on the right asset groups and opportunities. This requires practice and experience, which is easy to attain with the right amount of research and patience.

Choose an HTS solution that offers an easy interface to trade and invest. The right one like Sonic Trader offers futures options HTS solutions and other features for a smooth trading experience.