Investors often wonder about the difference between strategic investment vs tactical investment strategies.
Strategic investing is passive and based on a fixed asset allocation among different types of investments while tactical investing is active and invests in opportunities at any given time.
What Is Strategic Investing?
Strategic investing is popular due to its simplicity and success by many long term investors.
How Are Strategic Investments Selected?
Strategic investing holds both offensive and defensive investments. Offensive investments are those that do well during economic expansion and related rising stock markets. Examples are stocks and commodities.
Defensive investments, on the other hand, are those that tend to perform best during economic slowdowns and stock bear markets. Examples are bonds, and cash or short term debt.
Strategic Asset Allocation
A core principle of strategic investing is based on buying set percentages of noncorrelated assets, such as offensive and defensive assets described above. The principle is that when one type of investment (aka “asset class” in financial lingo) is rising, another type will be falling.
This principle is at the core of portfolio risk management for strategic investing.
What goes up when stocks go down? Historically, bonds have almost always gone up when stocks have experienced bear markets so bonds help manage stock market risk. This inverse relationship between stocks and bonds is foundational in almost all strategic investment portfolios, and why almost all strategic portfolios have stocks and bonds. By owning both stocks and bonds, investors are always at least somewhat prepared for bear markets while also capturing bull markets with a good chunk of their assets.
Strategic Investing Example
A simple strategic investing example is a portfolio with the following percentages of stocks, bonds, and cash:
- Stocks 60%
- Bonds 30%
- Cash 10%
Note that many asset allocation models include portfolio cash or money market accounts, like this example, while others assume cash is calculated in net worth more so than a part of the investment portfolio.
Strategic Asset Allocation Percentages
Strategic investing is based on an asset allocation model that holds the same percentage of different types of investments regardless of valuations or economic conditions.
Using the above strategic asset allocation, if stocks became extremely overvalued, the allocation would remain the same. Rebalancing is typically done annually to bring the portfolio back to its original asset allocation.
The focus is on the asset allocation with strategic investing, not asset valuations.
How Strategic Asset Allocations Are Determined
Strategic investing is based on an asset allocation model that considers the factors related to the investor, primarily risk tolerance, age, and net worth.
A 55 year old, for example, will likely want less stock market risk than a 40 year old since retirement is usually closer for the 55 year old.
Are Alternative Investments in Strategic Portfolios?
For example, real estate can add value to a strategic portfolio dues to its higher yield while gold can act as a defensive investment during times of high economic uncertainty, bear markets, or the rare financial crisis.
Again, the main principle with strategic investing is the movement relationship between the various assets in the portfolio.
The goal is that each asset will contribute to long term growth in the overall portfolio under various market and economic situations while also controlling risk.
Who Uses Strategic Investing?
Both self-directed investors and financial advisors use strategic investing due to its ease of implementation and historical success over most long time frames.
Strategic investing has an extremely committed following; most Bogleheads of the world would defend strategic investment strategies to the end.
Investors who want a straightforward, easy to implement model use strategic investing. This is why strategic investing is considered passive investing.
Are Stocks or ETF’s Used for Strategic Investing?
Individual securities, index funds, and ETFs (Exchange Traded Funds) can all be used for strategic investing as long as the asset allocation is followed.
Strategic Vs Tactical Investing
|Strategic Investing||Tactical Investing|
|Passive Investing||Active Investing|
|Follows Asset Allocation||Invests Based on Opportunity|
|Inflexible for Economy and Markets||Flexible for Economy and Markets|
|Manages Risk Through Non-Correlated Assets||Manages Risk By Asset Valuations or Moves|
|Tax Efficient||Less Tax Efficient|
|Less Effort||More Effort|
|Individual Investors and Financial Advisors Use||Individual Investors and Financial Advisors Use|
|Minor Changes During Annual Reallocation||Changes Based on Opportunity|
Tactical investing is different from strategic investing in several ways even though there are usually commonalities in both methods.
What Is a Tactical Investment Strategy?
A tactical investment strategy considers opportunities based on current valuations and economic conditions in investment selection rather than adhering to a rigid asset allocation model.
I like to think of tactical investing as old fashioned investing; investments are made based on opportunities at any given time. This is how Warren Buffett made his fortune even though he recommends a simple strategic passive investing strategy for investors now.
Tactical Investment Example
Let’s consider a 50 year old investor that normally likes to have an asset allocation of 60% stocks, 30% bonds, and 10% cash given her lower risk tolerance. She noticed stocks had been increasing in price for years. After some investment evaluation, she confirmed stocks were trading much higher than normal (historical) valuations. So, she changed her asset allocation to 30% stocks, 50% bonds, and 20% cash to lower stock market risk.
Two years later, the stock market returned to historically low valuations due to a bear market, so she made a tactical investing move to increase the percentage of her portfolio invested in stocks to take advantage of the low valuations. Her new asset allocation was 70% stocks, 20% bonds, and 10% cash.
Alternative Investments in Tactical Asset Allocations
Tactical asset allocations, or TAA’s, often hold both offensive and defensive investments, they just don’t adhere to a set asset allocation of them at all times.
Many tactical investors gradually increase or decrease asset class percentages, while a lesser number of tactical investors go all or none into one asset class.
A tactical investment portfolio may hold all stocks, for example, or all cash in a portfolio. Alternatively, a tactical strategy may increase the usual allocation from 30% to 60%, for example, based on an expected price movement.
When the popular term “overweight a sector” is used, a tactical decision has been made to increase a more usual asset allocation. This indicates that the investing strategy being used is tactical.
Tactical Asset Allocation Changes
Changes to tactical asset allocations are often based on advanced systems designed around price movements, or technical factors. Other tactical investing is done based on judgment calls related to fundamental factors, often from changes in the economy.
Many professional wealth managers combine fundamental and technical analysis to make changes to tactical asset allocations. Such research is often done through huge research departments and expensive data analysis at major financial institutions. Access to such extensive research can be a huge pro for financial advisors as long as wealth management costs don’t offset the benefit of using an advisor.
Individual investors, however, can also implement professionally developed tactical asset allocation models due to the increased access of investment data to self-directed investors.
Tactical investing performance, then, is more about the ability of the system or portfolio manager while strategic investing is more about movements in the financial markets and the chosen allocations.
Disadvantages of Tactical Asset Allocation
Unfortunately, markets go up and down longer than expected, and valuations can stretch away from historical pricing more than expected, making tactical investing challenging.
Tactical investing can trigger higher taxes since short term capital gains are more likely with a tactical investing strategy than strategic investing.
Higher investing costs can also be a disadvantage of tactical investing, although this is less of a problem given the commission free transactions now available at many brokerages, and the fact that many financial advisors charge a flat fee.
Tactical investing takes more effort than strategic investing. Therefore, investors who enjoy following the financial markets and economic activity are best suited for tactical investing because it is a more advanced investing strategy. Tactical investing, however, can also be implemented by following a tactical asset allocation model developed by an expert, and many financial advisors implement tactical investing strategies for their clients as previously addressed.
Tactical investing is often criticized as market timing. In reality, investments are bought based on opportunities due to valuations or technical analysis by prudent tactical investors. While there is an element of market timing with strategic investing, is it necessarily a bad thing for proven strategies and experts?
It’s also worth noting that market timing is done by strategic investors when they fall prey to unsuccessful market timing by abandoning a previous commitment to a strategic asset allocation. This is often done at stock market bottoms due to investor emotions.
Strategic Vs Tactical Investing Summary
As you can see, there are advantages and disadvantages to both strategic investing and tactical investing. Every investor must decide whether strategic investing vs tactical investing makes the most sense for them based on their own investing style, desired investment returns, and risk tolerance.
Prefer video? Here’s my video on strategic vs tactical investing.