To say the markets got off to a rough start in the first month of the year would be the understatement of the century. After the S&P 500 had its worst five trading days dating back to the 1950’s, many investors panicked and sold. While volatility can be a scary thing, it doesn’t mean you should cash out all your investments and stash the cash in a safe place. Common advice is to ride out the markets during turbulent times, but this is often easier said than done. While most people are familiar with passive/index investing, I’d like to introduce you to a form of investing you may not be aware of: tactical asset allocation (TAA).


What is Tactical Asset Allocation?

Unlike a passive management portfolio strategy like index investing, TAA is an active management portfolio strategy that rebalances the assets in your investment portfolio in various categories and sectors. This lets you take advantage of market pricing anomalies and booming market sectors. For example, if oil was once again booming, you would be able to go along for the ride, while minimizing your downward risk. This investment strategy lets you take advantage of certain situations in the market. It’s considered an active strategy since your portfolio returns to its original asset allocation once short-term profits are achieved.


To better understand TAA, let’s use a sports analogy. As the famous saying goes, the best defense is a good offense. Rather than sitting on the sidelines and hoping to ride out the markets with minimal loses, TAA takes an active role in the markets. A lot of the focus on tactical asset allocation is the ability to play defense and protect investor’s capital while remaining nimble enough to take advantage of market opportunities as they present themselves.


The famous investment advice is to buy low and sell high, but this is often easier said than done. Much of the success of investors can be attributed to behaviour. As an investor, you expect to come out ahead in a bull market and minimize loses in a bear market. When you use TAA, your portfolio is built to match the level of downside risk it can withstand.


Of course, volatility can work both ways – it can work in your favour and to your detriment. When you use TAA, you equip yourself with the financial tools to protect yourself from the downside of volatility. When a portfolio is built using TAA, it is built with your tolerance for downside risk, level of volatility, time horizon, and specific goals in mind.

If January is an omen of things to come for the markets in the coming months, it’s important to come prepared. If you’re looking to explore another strategy besides the age old buy and hold strategy, feel free to contact our office. We’ll walk you through a TAA strategy to make sure you’re better protected the next time the markets take a nosedive.