Is tactical allocation a good strategy?

Wed, 4 Jun Pre-Open

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If someone asks you, what is the reason behind making investments? The obvious answer is going to be making good returns, out of it. Now these investments can be made in any asset class say gold, equity, debt or in all of these in some proportion. Whatever may be the class of investment, whether debt oriented or equity oriented, the core idea remains the same of earning best returns.

An article in Economic times mentions that a group of financial advisers are asking investors to make additional investments towards equity owing to current market conditions. The emphasis is made towards tactical asset allocation (TAA) - an active management portfolio strategy which dynamically allocates assets across the asset classes depending upon the economic outlook. As per this group, if an individual had made higher investment in debt a year ago, when the economic outlook was not encouraging, they could have earned better returns. Similarly, as the current market conditions now look promising, so now it is time to make more investment towards equity.

On the face of it, this strategy looks good and encouraging. However like any other investment strategy, investors should also be aware of the risks before investing. The biggest risk in our view is making short term moves depending on the market conditions. This is because; markets are influenced by internal as well as external factors. Thus one never knows which event can impact the current market rally or for how much time the current rally will last. In such situation all the investments can go haywire. However the investors who have adapted prudent investment practices will be better off.

At Equitymaster, we thus always encourage long term investments in fundamentally strong class of assets. And we continue to believe the same. Timing the market and making investments based on economic outlook adds little value to one's portfolio. Further, frequent churning the portfolio can bring in more costs. As higher churning would also increase transaction costs which in turn impacts the wealth of your portfolio. Thus in long run only those investments sustain which are made keeping in mind their intrinsic value, fundamentals and growth prospects. By doing so, one can rest assured of good returns over the period of time.

Among our various editorials, one of our 5-mins wrap up too had highlighted some interesting facts as to how can one earn better returns by not being too active. Click here to know more about it...

How frequently do you churn your portfolio? Do you think that you will generate better returns on your portfolio if the churning is reduced? Share your views on Club Equitymaster.