Strategic and Tactical asset management are typically terms that are thrown around without much context. While investors may think these two management styles technical terms that they need not pay much attention, but that is not the case. There are distinct differences between the two management styles. These difference may affect your investment outcomes.
While no one strategy is necessarily better than the other, it is important to understand how each works within a portfolio so that you can work with your advisor to utilize the approach that you are most comfortable with.
Strategic
Money that is strategically managed is allocated in a way that aligns with an investors risk tolerance and investing horizon. Money that is being managed strategically is usually set to work within certain parameters that remain stable over time. For example, it may be determined that a certain investors risk tolerance and objectives would be suitable to 40% invested in bonds and 60% invested in stocks. If the investor was using a strategic strategy, they would invest their money in accordance with the predetermined allocations. The strategic asset allocation is often referred to as the buy and hold strategy. This is only accurate in referring to the asset allocations. The investments held within each allocation are often rebalanced when necessary.
Tactical
A tactical asset allocation is an actively managed investment strategy. The basis of a tactical strategy may be the same as strategic, however, the strategy allows for deviation from set parameters in order to take advantage of market opportunities in the short term. For example, the same investor in the example above that is investing using a tactical strategy may have a base model portfolio of 40% bonds, 60% stocks. However, if commodities become an attractive investment, the investor may rebalance to include commodities in the portfolio in order to take advantage of the opportunity for a period of time. Therefore, it may be decided that it would beneficial to hold 40% bonds, 40% stocks, and 20% commodities for a period of time. This works in reverse as well. If markets have a volatile outlook, an investor could increase their cash holdings to mitigate some of the risk and ride out the downturn.