Neal Templin’s column in today’s WSJ, “Honey, I Shrunk the Nest Egg,” is an excellent illustration of the need for Tactical Asset Allocation—even though, on the surface, his column had nothing to do with Tactical Asset Allocation.
“For years, my wife and I have had an understanding. Clarissa would spend the money, and I would save it.
Well, Clarissa is still holding up her end of the bargain, but I’m an abject failure. My company retirement accounts, despite what I thought was a relatively conservative mix, were down close to 35% in early March from the fall of 2007. That, in turn, forced me to do some painful thinking about how much risk I can stomach on my family’s behalf, and how much money we can expect to have in retirement…
My conclusion: My longtime portfolio allocation of 50% stocks and 50% bonds wasn’t safe enough. I’ve already begun gradually trimming back my stock position each time the market rises. When I’m done with this transition — and it could take a couple of years — I will have a portfolio that can better ride out storms. But it will also be a portfolio less likely to produce a big nest egg.” —Neal Templin
I suspect that millions of investors have come to the same conclusion as Mr. Templin—they intend to move to an allocation that is dominated by fixed income so that they never again have to face devastating losses in their retirement savings. Mr. Templin, and many others, make asset allocation decisions in order to create the “ideal” allocation, given their risk tolerance. Up until this bear market, Mr. Templin’s asset allocation consisted of 50% stocks, 50% bonds. Now, he will dramatically overweight bonds.
A Tactical Asset Allocation approach address the issue of managing risk from a totally different perspective. Instead of creating a static asset allocation, a tactical approach shifts exposure to asset classes based on the relative strength of each of the asset classes. Tactical Asset Allocation will certainly experience losses along the way, but it is a much more dynamic approach. Instead of deciding to be either aggressive, moderate, or conservative, a tactical asset allocation simply says that we’ll let the markets determine the allocation.
—-this article originally ran 5/22/2009. Over the past year and a half, we’ve seen millions of investors pour into bonds like Mr. Templin, making the assumption that they were reducing their risk exposure. Now that premise is not so clear. As Andy points out, tactical asset allocation is dynamic and adjusts to the market situation.
