What is the purpose of tactical asset allocation?

Tactical asset allocation is designed to enhance returns by allowing for short-term adjustments to an investor's asset allocation based on market forecasts and anticipated changes in economic conditions. This approach involves actively making decisions regarding the proportion of different asset classes in a portfolio, rather than adhering strictly to a long-term, fixed investment strategy. By shifting the allocation in response to perceived opportunities or risks in the market, investors aim to capitalize on short-term movements—which can lead to higher returns than a static allocation would provide.

This method contrasts with maintaining a fixed investment strategy, which (while potentially suitable for some investors) does not leverage current market conditions to optimize performance. The goal of tactical asset allocation is not to eliminate market risks entirely, as that is inherently challenging in investing, but to navigate and adapt to those risks effectively. Additionally, while security selection is an important aspect of managing a diversified portfolio, tactical asset allocation primarily focuses on adjusting the mix of asset classes rather than prioritizing individual security choices.