Using Tactical Asset Allocation For Investing
July 2005©
By Neil Sosler & Marc Singer
There are many types of investment strategies available to long-term investors who choose a specific money management plan in their portfolios. Passive strategies mirror a market index while not attempting to beat the market. Active strategies seek returns in excess of a specified benchmark. We believe that it is possible to achieve above market returns with less than market risk. This can be accomplished by reducing downside risk during a correction and obtaining market returns or better when conditions improve.
Active vs. Passive Management
There are a number of active approaches to managing money. One of the most cutting edge ways that we have utilized is called Tactical Asset Allocation (TAA). Webster’s New Collegiate Dictionary defines the word ‘tactical’ as - adroit in planning or maneuvering to accomplish a purpose. This is an appropriate interpretation of what is involved in actively investing money. TAA involves changing investment styles and sectors to react to or anticipate changes in the market.
Knowing that the market was overvalued in 1999, TAA required moving assets from overvalued sectors of the market to undervalued (and safer) areas. When the market corrected in 2000 - 2002, the NASDAQ and S&P 500 indices bore the brunt of the pain. The S&P 500, an index that represents large cap growth companies, had the farthest to fall during this monumental correction. But smaller, value oriented investments were not overpriced in 1999, quite the contrary. These companies had been overlooked for many years due to the impressive returns in the large-cap growth sector. So the logical move was from Large-Cap Growth to Small-Cap Value.
In 2000-2002, the S&P 500 fell over 37% but the Small Cap Value sector went up 24%.
A passive investor would not have reacted, thereby suffering through one of the worst market corrections in the modern era. The problem with the passive scenario is that most investors have a breaking point and will take action at just the wrong time; after experiencing losses too large to handle, they sell out at the bottom. This is compounded by being “gun shy” when the market improves and missing out on renewed portfolio growth.
The Results
During the difficult times in the market from 2000-2002, the S&P 500 was down over 37% (the NASDAQ was down over 75%). Small-cap value funds during this period were up over 24%. A typical well-diversified portfolio using TAA should have had only moderate losses of about 10%. Through the use of bonds and equities, picking managers who consistently outperform their respective benchmarks, and using TAA to move money to undervalued sectors of the market, an investor can truly limit downside risk. As the market became oversold (the market has always traded to extremes in both directions), TAA dictated moving back into the growth sectors again. In early 2003, the sector with the most potential was small-cap growth - up 69% through 2004. A moderate TAA portfolio rose by 40% in those 2 years.
Conclusion
Tactical Asset Allocation allows an investor to earn above market returns while still incurring lower risk than the overall market. It is no longer acceptable for investors or their advisors to be asleep at the wheel. It is especially useful during today’s turbulent times.
Singer Xenos is an established wealth management firm specializing in physicians with $500,000-plus in investments. We manage over $500 million in assets such as retirement plans, annuities and personal accounts, with an emphasis on wealth building and protection from malpractice claims. Both Worth Magazine and Medical Economics named Singer Xenos one of the Top Financial Advisors nationally for physicians. Physician Asset Advisor and Singer Xenos do not provide legal advice.
