What Is Asset Rotation?

The word is getting out about asset rotation investing after decades of popular buy and hold investing.

What is asset rotation exactly? Asset rotation investing rotates into asset classes that are increasing in price and out of assets that are decreasing in price. Rotation timing is often based on technical factors for the asset classes.

rotating globeIn this post, I’ll address:

  • How asset rotation is done
  • How asset rotation compares to buy and hold investing
  • The resource I use to select and implement an asset rotation strategy
  • The most popular security for asset rotation
  • The effort required to successfully rotate assets

Let’s get started.

Asset Rotation Vs Sector Rotation

Sector rotation has become relatively popular recently, but it is different from asset rotation. Investors rotate into stock market sectors, such as energy, financial, or technology, with sector rotation.

On the other hand, with asset rotation, investors rotate in and out of major asset classes instead of just individual securities within one asset class, the stock market.

While sector rotation makes a lot of sense because different sectors of the stock market perform differently based on the economic environment and other factors, sometimes the stock market as a whole goes through a major bear market. It’s true that some sectors do perform better than others during those bear markets, but the market as a whole generally takes a beating during bear markets.

Instead of “riding out the bear market”, an investor using asset rotation would rotate out of the stock market and into another asset class that is going up as stocks go down. A common example would be a rotation out of stocks and into treasury bonds or a money market account.

Asset rotation strategies can, therefore, reduce stock market risk.

What Assets Are Rotated Into and Out Of?

Asset rotation strategies can rotate into any number of asset classes. The asset classes are usually represented by the most popular indexes. Investors commonly use ETFs, but mutual funds can be used also for rotating asset classes.

Many asset rotation strategies rotate in and out of only the most popular major stock and bond ETFs, such as SPY and IEF.

More advanced strategies might rotate into any of the following assets in addition to a variety of stock and bond ETFs:

  • Commodities
  • Real estate
  • Foreign government debt
  • Gold
  • Cash

I personally prefer asset rotation strategies that rotate into assets other than simply stocks and bonds as explained in my Allocate Smartly Review post.


When to Rotate Assets in a Portfolio?

Unfortunately, individual investors are wrong most of the time about when to rotate assets. Admittedly, it’s very hard to discern, even for financial advisors, which is one reason many stick with fixed asset allocations for their clients. Plus, investors often get trapped in emotional investing.

Fortunately, investors wishing to practice asset rotation investing can follow a strategy that has been professionally developed and thoroughly backtested. One important element of the strategy is rotating in and out of assets based on certain events occurring. Usually, that event will be based on a technical factor.

Therefore, most investors practicing asset rotation simply rotate in and out of assets when signaled by the strategy.

Are Assets Completely Exited?

Some asset rotation strategies rotate completely out of an asset class all at once while other asset rotation strategies gradually rotate out of an asset class.

How Often Are Assets Rotated?

Timing frequency can vary among asset rotation strategies. One strategy may rotate several times a day while another strategy may rotate once a year.

Asset rotation strategies that rotate daily are geared toward traders while asset rotation strategies that rotate every few weeks or less often are geared more toward investors.

How Much Effort Is Required to Make Asset Rotations?

The amount of effort required to implement an asset rotation strategy depends on the strategy selected. Obviously, a strategy that performs daily will take much more effort to implement than a strategy that rotates yearly.

Let’s assume, like me, you’re an investor and not a trader, so you’ve selected a strategy that usually rotates assets monthly. In this case, there is not a lot of effort required to make the rotation if you’re implementing the strategy with the aid of a tool such as Allocate Smartly.

For example, it takes me less than an hour a month to implement asset rotations. I simply log into my brokerage account and buy and sell the ETFs as indicated by the strategy that I follow using my Allocate Smartly dashboard.

On the other hand, if you are analyzing charts and/or macroeconomic factors on your own to determine when to rotate assets, a good deal of expertise and effort is required to determine when to make asset rotations.

Is Asset Rotation the Same as Rebalancing?

Buy and hold investors rebalance fixed percentages of various asset classes without using asset rotation. In order to maintain the set percentages, however, securities must be bought and sold periodically. This is usually done annually although some investors prefer to rebalance by annually or even quarterly.

Rebalancing is different from asset rotation in several ways.

  1. Asset rotation investing does not have specific percentages of asset classes that must be held continuously.
  2. Traditional buy and hold investing determines the percentages held in asset classes based on investor criteria. Asset rotation investing determines the percentages held in asset classes based on potential opportunities that present themselves at any given time.
  3. Rebalancing is part of a strategic investment strategy and a tactical investment strategy rotates asset classes.
  4. Asset rotation is based on a more advanced investing method.

Does Asset Rotation Outperform Buy and Hold Investing?

Some asset rotation strategies outperform buy and hold investing methods and vice versa.

In other words, there are both good and bad asset rotation strategies and good and bad buy and hold investing strategies.

Fortunately, investors can usually check the past performance data of any asset rotation strategy they are considering against a traditional buy and hold benchmark portfolio when index ETFs are used to rotate.

Unfortunately, however, many investors don’t realize this can be done or know how to go about doing it. This can lead investors to poor performance. That poor performance can lead investors to think it was the type of strategy that was the problem (asset rotation) when in actual fact it was the asset rotation strategy selection that was the problem.

Can Asset Rotation Be Done in a Retirement Account?

Asset rotation can be done in IRAs and many 401Ks. I personally use an asset rotation strategy in multiple retirement accounts.

One issue I’ve seen with my financial coaching clients is when a 401K limits the ETFs that can be owned in the retirement account. A similar, substitute ETF that is allowed can often be used as a replacement, however.

Why Don’t More Investors Rotate Assets?

The reality is that asset rotation is an advanced investing strategy. Most investors, and many financial advisors, want to use simpler strategies that don’t rotate asset classes.

There’s also the fact that rotating assets can trigger higher taxes when done in a regular vs a retirement account.


Note: Allocate Smartly is one of the few programs for which I am an affiliate because I find it to be an excellent product. 







The information on this website is for education only and is not to be construed as personal financial advice.