Understanding the difference between strategic and tactical allocation
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Understanding the difference between strategic and tactical allocation

Updated
3 Jan
2024
published
10 May
2023

What is strategic asset allocation?

Strategic asset allocation is a long-term strategy, whereby you decide how to divide your investment portfolio among different asset classes — mainly stocks, bonds, and cash — based on your risk tolerance, time horizon, and financial goals.

You start by setting the target weights or proportions for each asset class.

As these weights will tend to deviate from your targets over time, due to the assets’ differing performance. You would periodically rebalance your portfolio at regular intervals, such as annually or semi-annually back to the original targets.

The aim is to balance risks and returns through a diversified investment portfolio in the long run, to attain your financial goals.

How strategic investing works

Here’s an example to illustrate how strategic asset allocation works. 

Doris is 30 years old and has a moderate risk tolerance. A year ago, she invested $200,000, split into 50% equities, 30% bonds, 15% commodities, and 5% cash.

The table below shows her target allocations as well as the assets’ current market values a year after she made these investments, based on their respective annual returns.

Source: Endowus Research

After a year, her portfolio value has now grown to $215,050. It is now made up of 52.1% equities, 28.6% bonds, 14.6% commodities, and 4.7% cash. These weights deviate from Doris’s target proportions.

Under the strategic asset allocation approach, she therefore readjusts the investments in each category back to the original targets, as shown in the following table. For instance, to make sure equities make up half of the latest $215,050 portfolio, she sells $4,475 worth of shares. Using those sales proceeds, she buys more bonds and commodities while putting more cash into the portfolio.

Source: Endowus Research

After the rebalancing, her portfolio is back to 50% equities, 30% bonds, 15% commodities, and 5% cash. This is considered a strategic, passive asset allocation strategy, as it does not require frequent changes to the portfolio in response to short-term market fluctuations. 

What is tactical asset allocation?

In contrast, the tactical asset allocation strategy is an active investing approach. It involves more frequent trading and a shorter-term view.

Tactical investors modify their portfolio’s allocations based on the latest market conditions, which may change often. The goal is to maximise short-term profits and portfolio returns.

By actively shifting the proportions of their investments, they hope to take advantage of prevailing or expected market trends, economic conditions, or perceived mispricing opportunities.

Staying with the earlier example, let’s say Doris would now like to switch to a tactical asset allocation approach. She expects a recession to happen soon with growing inflationary pressures. As a tactical investor, she decides to shift away from equities and into lower-risk and potentially inflation-hedging assets such as bonds and commodities. She keeps the cash allocation at 5%.

When Doris rebalances her $215,050 portfolio, she cuts the weighting of equities to 40%, from 50% previously. The proportion of bonds is increased to 35%, from her original target of 30%. And she allocates 20% to commodities, up from 5% under the strategic approach.

Source: Endowus Research

If she sticks with tactical asset allocation, Doris will likely adjust her portfolio again when the global economy recovers. This may involve buying more shares so she can become more aggressive with regards to equities.

Set a core-satellite investing strategy

A core-satellite investment strategy is a method to construct your portfolio, where you can combine elements from both strategic and tactical asset allocation. 

The core component tends to represent your strategic asset allocation and can be managed passively. It may include a large-cap stock index fund that provides exposure to a wide variety of industries, sectors, and geographies, for instance. Another possibility for your core holding could be a classic 60/40 balanced portfolio of equities and bonds. 

You can build your core strategic asset allocation using the Endowus Global model portfolios, which are constructed with the objective of being a one-stop solution for investors who want to invest in a globally diversified portfolio. You can start from one of six risk levels varying in allocations to equities and fixed income, and customise it to suit your personal needs. Learn more about Endowus Global model portfolios in this article.

Satellite investments with more concentrated or narrower exposure can be used to complement your core holdings, for example in a single country, a specific sector, or a theme (such as technology or China equities).

Core-satellite investing can offer the best of all worlds. The core component may use a strategic allocation approach to churn out consistent returns at low costs over the long run, while the satellite holdings give investors the flexibility to supplement their portfolio with tactical short-term opportunities to enhance returns. 

The core-satellite concept is a prudent way to manage your total portfolio for long-term results. It is favoured by institutional investors as well as individual investors who plan to stay invested in the long run.

Build your core-satellite investing portfolio today

Find out how our Endowus Global model portfolios can be used to make up the core of your investment portfolio. For satellite exposures, the Endowus Investment Office has created a suite of Satellite model portfolios designed to give you institutional-grade portfolios within each satellite category for further diversification or to reflect your conviction in certain sectors, countries or themes.  Be it specific themes expressing your market views such as Global Technology, Future Trends, Sustainability or China Equities, or pockets to address your specific wealth needs such as cash management or generating passive income, the Endowus Satellite model portfolios give you a great starting point: carefully curated, diversified and fuss free.

We recognise everyone has specific circumstances and needs or preferences for customisation. You may also choose to express such tactical asset allocation views by selecting single funds on Endowus Fund Smart, which gives you access to a curated suite of Best-In-Class Funds at a significantly lower cost as compared to other platforms.

To get started with Endowus, click here.

How to access the Endowus model portfolios in Hong Kong on Fund Smart 

If you are new to Endowus in Hong Kong, you can get started either by opening an account with us here, or by clicking the button below. 

Already have an account with Endowus HK? Here are a few simple steps to start using Fund Smart:

  1. Login to your Endowus account
  2. Click on “Invest |  Redeem”
  3. Click on “Add Goal”, and then follow the instructions to select the fund or portfolio of your choice, based on your investment horizon and objective.

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