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Napa Valley Wealth Management - St. Helena, CA

Tactical Asset Allocation

We use a tactical asset allocation investment approach to manage our investment portfolio. Here's an intro, or refresher, to the basics of asset allocation. 

Asset Allocation: Reduce Portfolio Volatility

The primary benefit of using an asset allocation tactic is to reduce volatility in your portfolio, and reducing volatility can help reduce market risk.

Asset allocation refers to how your investment dollars are diversified among asset classes—not among individual stocks or industries, but among broad asset-class categories such as cash, stocks, bonds, and international funds.

Historically, broad asset classes have moved in relation to each other fairly consistently (i.e., when stocks are up, bonds tend to be down). The goal is to create a portfolio with a mix of classes that do not move in the same direction when the market changes. In doing so, you help keep risk and volatility in check.

Asset allocation investment portfolio strategies

Advanced asset allocation won the Nobel Prize for Economics in 1990. It's a scientific approach to finding the “sweet spot,” the right combination of classes that, at a given level of risk, will help minimize your losses and maximize your returns. For example, the portfolio of hypothetical client Mr. Smith may be comprised of 45% stocks, 30% bonds, 15% international funds, and 10% cash.

Rebalancing to Reduce Risk

A vital key to maximizing returns and reducing volatility and risk is rebalancing the asset classes in your portfolio back toward their defined ranges, shown above. Rebalancing can help reduce your exposure to areas of the market that are overpriced and have a greater risk potential. It can also help shift you toward underexposed asset classes that may offer greater opportunity.

Rebalancing is key because it removes emotion from our investment decision-making. It is a disciplined, systematic, and unemotional way to consistently take advantage of one of the most disciplined investment strategies of all—buy low and sell high.

Instead of operating out of fear or greed, as the average investor does, regular tactical rebalancing shifts away from risk and toward opportunities, and can help reduce the emotional roller coaster of participating in the markets.

We generally see that rebalanced portfolios, over time, generate very similar returns to those that are not rebalanced. The benefit is that volatility is reduced. Not only does this help you sleep better at night because your portfolio isn’t swinging wildly, but it also means your money doesn’t have to work as hard to make up lost ground during poor-performance periods.

Static vs. Tactical Rebalancing

There are two primary rebalancing strategies within asset allocation: static and tactical. Using a static approach, one would always rebalance back to the ratio mix of asset classes that were initially established. In our example, if stocks perform well and Mr. Smith’s portfolio grows to 60% stocks, 20% bonds, 10% international, and 10% cash, we would buy and sell asset classes to get back to the established goal ratios of 45/30/15/10.

Using a tactical approach, we would rebalance his portfolio toward opportunities—to take advantage of market pricing anomalies or strong market sectors. Again in our example, Mr. Smith’s portfolio grew to 60% stocks. Instead of simply rebalancing back to the original 45% as in a static approach, we would first look forward toward the equity asset class’s value and risk forecasts. If we think stocks are undervalued and provide opportunities that are within the risk parameters Mr. Smith has defined, we may stay at a 60% allocation for a time, allowing us to potentially create extra value by taking advantage of a timely situation in the marketplace.

This is the approach we use at Napa Valley Wealth Management. We shift away from risk and toward opportunities. The goal is to maximize return while minimizing risk.

The critical component of tactical asset allocation is the forward-looking forecast component, through which we assess future risk and opportunities.

At Napa Valley Wealth Management we establish these forward-looking forecasts quarterly in a formal setting. In addition to constantly analyzing the markets, economy, and allocations, we set aside a day each quarter to discuss these areas in great detail. Based upon the analysis of a wealth of historical and current data, we forecast the future values and the risks of the asset classes. We then rebalance our portfolio mix accordingly, toward opportunities and away from risk.

These meetings are our Investment Policy Committee (IPC) meetings, and from them we publish our quarterly Economic and Market Forecasts. These publications should help you further understand the market and economic conditions and forecasts that drive our tactical asset allocation investment approach at any given time.


Want to talk further about how tactical asset allocation may help you work towards your long-term wealth management goals?

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No strategy assures success or protects against loss. Asset allocation does not ensure a profit or protect against a loss. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.