TACTICAL ASSET ALLOCATION

Tactical asset allocation can be compared with sector rotation. But, instead of rotating among the economic sectors in the equity market, we would be rotating among the asset classes in the securities market. These asset classes are mainly stocks (equity), bonds (debt) and cash. The strategy involves a disciplined and quantitative structure to measure available returns.

Here the strategy is designed to exploit the shifts in the relative attractiveness of these asset classes. It also provides the discipline and confidence to take a contrarian position. Further, there is a tendency to buy the “out of favor” asset classes.

After due deliberation, the most appropriate asset allocation process would entail a study of the condition of disequilibrium in the market, with respect to the asset under study for investment. To be followed up with a measure of this imbalance and its resulting effect on the economics with regard to whether the market can sustain a return to an equilibrium condition. The investor would also have to give due regard to market sentiment at present and market sentiment expected in the future. And also the timing of the market, with respect to when it would move in time.

Therefore, in this process the investor would, firstly require a highly disciplined plan. And secondly, he would be able to undertake contrarian action. With the objective of enhancing the profitability of the transaction initiated by him.