Tactical asset allocation looks great, but is it practical to run your own portfolio this way?

Readers interested in this topic are likely open to the possibility of cultivating a portfolio that improves on indexing when it comes to risk control and long-term returns. Some may even be familiar with popular asset allocation systems like dual momentum and risk parity. But how much work is required to actually maintain such a portfolio and keep it in line with the chosen plan?

It depends.

A non-tactical global portfolio is simple to run, as it only requires allocating generously to foreign stocks, REITs, and gold, in addition to U.S. stocks and bonds, and rebalancing periodically. A diversified five-asset buy-and-hold portfolio will likely produce solid returns with less downside per unit of upside than a conventional 60/40 portfolio.

A tactical value portfolio is almost as simple. You need a source for reliable valuation data, a way to rank countries or asset classes, and a rule for investing in the cheapest group each year. A more universal value system, where exposure is scaled up or down across many markets according to valuation, requires checking in periodically to see whether changes are required.

Tactical momentum is the most difficult and labor-intensive of the approaches discussed here, but it can also be the most useful from a risk-management standpoint.

For that, you need data and a spreadsheet or specialized software. A basic momentum system can be quite simple in design, requiring only that you track dividend-adjusted ETF prices and calculate their simple moving averages. But the simplicity of the rule should not be confused with ease of execution.

The calculation must be done every month after the close, and trades must be placed no later than the next trading day if the system calls for changes. There are excellent online services that can run these calculations, but even that commitment may take more discipline than many investors expect. You may be traveling, ill, busy with work, or otherwise distracted at the exact time the portfolio needs attention.

Rules only help if they are followed.

This is one of the practical challenges of tactical investing. The ideas are often simple enough to explain in a few paragraphs: own an asset when it is above a moving average, reduce exposure when valuation is poor, rebalance according to a defined schedule, and avoid making emotional exceptions. The difficult part is not usually understanding the rules. The difficult part is executing them consistently, especially when the rules feel wrong.

A value strategy will sometimes tell you to buy what everyone hates. A momentum strategy will sometimes tell you to sell after a decline or buy after a recovery has already started. A diversified tactical portfolio will sometimes look strange compared to a conventional benchmark. That discomfort is part of the bargain.

A good tactical manager can improve the process by using many asset classes, multiple parameters, and multiple tranches to reduce timing luck. These are simple sources of improvement, but they require infrastructure, discipline, and experience. The investor also needs clear records, consistent implementation, and an understanding of how the strategy is supposed to behave before the inevitable uncomfortable period arrives.

Whether to do it yourself is a personal decision.

If you enjoy technical work and have the patience to learn the craft over many years, it may be worth the risk of mistakes and missed gains while you improve. You may not even care about advancing beyond a simple beginner portfolio, because you value control and transparency more than complexity.

In that case, a rules-based DIY approach can make sense, provided you can stick to the plan as though contractually bound.

Otherwise, it may be better to outsource the process to a professional manager who already has the systems and discipline in place. The point is not that tactical allocation is too complex for individuals. The point is that the practical burden should be taken seriously. A simple rule that is not followed is worse than a slightly less elegant process that actually gets implemented.

Tactical asset allocation is not magic. It is process.

The investor has to decide whether he wants to own the process himself, with all the maintenance and behavioral discipline that requires, or delegate it to someone whose job is to keep the portfolio aligned with the rules when the rules become inconvenient.

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Originally published by Michael Ritger, December 2019. Republished by Fortuna Investors.

This material is for informational and educational purposes only and should not be construed as personalized investment advice. Investing involves risk, including the possible loss of principal. Past market behavior does not guarantee future results.

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