Cyclical tactical asset allocation is a dynamic
investment strategy
In finance, an investment strategy is a set of rules, behaviors or procedures, designed to guide an investor's selection of an investment portfolio. Individuals have different profit objectives, and their individual skills make different tactics ...
using an approach based on economic cycles. The cyclical approach to
tactical asset allocation
Tactical asset allocation (TAA) is a dynamic investment strategy that actively adjusts a portfolio's asset allocation. The goal of a TAA strategy is to improve the risk-adjusted returns of passive management investing.
Strategy descriptions
TA ...
involves monitoring the economic environment for patterns that have historically led to trends in
stock market
A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include ''securities'' listed on a public stock exchange a ...
movements; see
Stock market cycle. As stock price and bond yield movements are connected to changes in the economic environment. Guidelines to these patterns can be followed to ascertain changes in market direction to a varying level of accuracy. This is very helpful to an investment decision because an exact "reversal point" is practically impossible to determine. Investors can use this information to improve their performance returns by modifying their
strategic asset allocations.
In this way, an investor with an asset mix of stocks and bonds could use the cyclical approach to tactical asset allocation to rebalance the amount of their investment portfolio in each in a favorable manner based on the economic cycle. For example, the investor could increase the allocation in
bond
Bond or bonds may refer to:
Common meanings
* Bond (finance), a type of debt security
* Bail bond, a commercial third-party guarantor of surety bonds in the United States
* Fidelity bond, a type of insurance policy for employers
* Chemical bond, t ...
s and decrease the allocation in
equities
Stocks (also capital stock, or sometimes interchangeably, shares) consist of all the shares by which ownership of a corporation or company is divided. A single share of the stock means fractional ownership of the corporation in proportion t ...
when it is expected that the economy is heading into a
recession
In economics, a recession is a business cycle contraction that occurs when there is a period of broad decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be tr ...
. Historically, bonds have outperformed stocks in recessionary periods.
References
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Investment management