Your Investment Approach: Tactical vs. Strategic

You understand the basics of stocks vs. bonds and, you know that the mix of both in your investment portfolio is referred to as an asset allocation (need a refresher? Go back and listen to episode 64). 

But how do you actually set up that allocation? 

Whether you want a 100% stock portfolio or something with more bonds, like a 60-40 split, you need to know how to get there. 

That’s where tactical and strategic investing comes in. These two strategies dictate how you achieve your desired asset allocation. I discussed this topic in episode 65 of The Canadian Money Roadmap, or part three in this series on building your own investing approach. 

Here’s the breakdown of tactical vs. strategic investing so you can choose what’s right for you. 

What is Tactical Investing? 

Tactical portfolio management is the idea that you’re changing your asset allocation, or the mix between stocks, bonds, and other asset classes. 

The goal behind changing your allocations to stocks and bonds is to, hopefully, increase returns and decrease risk. 

A tactical investor may make decisions to change their asset allocation on any number of factors, including: 

• What’s going on in the broad economic landscape

• Trending and emerging sectors, or personal interest areas (i.e., ESG investing)

• Future projections, assumptions, and ideas

Because there are so many things to consider, high-level tactical portfolio management requires an involved understanding of market pricing and other factors that impact returns. This makes it a challenging approach for most investors. 

Potential Benefits of Tactical Investing

The goal of tactical investing is to earn higher returns by making frequent changes to your portfolio. There are a few potential benefits to this approach: 

• May reduce volatility, as you follow the market as it trends up and down. 

• Can take advantage of current trends. 

• The psychological benefit of feeling like you are doing something with your portfolio and taking action when the market is down. 

These benefits are not guaranteed, though. There is a lot of evidence that would suggest that the vast majority of people who try to implement a tactical strategy end up failing due to chasing returns and selling at poor times. Remember, for most of us, think of your portfolio like a bar of soap: the more you touch it, the less of it you’ll have.

What is Strategic Investing? 

Strategic portfolio management is a static approach—it doesn’t generally change over time. 

If you have a 60-40 (stocks to bonds) portfolio, your goal is to maintain that. Over time the stocks will increase in value, so it may start looking like 70-30. In this case, you need to rebalance it back to 60-40. 

Besides rebalancing, the only time you make changes to the asset allocation in your portfolio is when your life or financial situation changes, such as entering retirement. In that case, you may want to take on less risk than earlier in life and will change your portfolio accordingly. 

So while tactical investing changes based on external market moves, a strategic investing approach will only change based on your life circumstances. 

Potential benefits of Strategic Investing

Strategic investing has a few potential benefits: 

• Simple strategy with few decisions required. 

• May perform better due to fewer opportunities for human error. 

• Lower cost as there are fewer trades and transactions. 

Strategic investing is a simple strategy that may appeal to investors who don’t want to think about their portfolios too much. And because it is a simple approach, it also generally costs less to participate in. 

Whether you choose a tactical or strategic strategy, there are multiple ways to implement it. You can manage your own portfolio and be the person to make tactical shifts or set up a strategic allocation. 

Or, you can work with a financial advisor or investment manager to set up the strategic portfolio or manage tactical allocations behind the scenes. 

If you want to hear more on this topic, listen to the full episode, or contact me with any questions you have. 

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Evan Neufeld is a CERTIFIED FINANCIAL PLANNER® professional in Saskatoon, Saskatchewan and offers both investing and fee-only financial planning services.

*Disclaimer: Any numbers or rates of returns are used for illustration purposes only and should not be taken as fact. Note that the information in this article is current to the time of writing but is not guaranteed as up-to-date past then.

This article and accompanying podcast do not constitute personal financial advice. Evan Neufeld is a CERTIFIED FINANCIAL PLANNER professional in Saskatoon, Saskatchewan, and provides this Canadian personal finance content for educational purposes to the public. You are welcome to contact Evan to receive personalized fee-only financial planning or investment portfolio management.