An RIA’s Definitive Guide For Tactical Asset Allocation

tactical asset allocation mobile phone

Welcome to the RIA’s Definitive Guide for Tactical Asset Allocation. Whether you’re a seasoned financial advisor who owns your RIA or just getting started, our Quick Guide on Tactical Asset Allocation will provide a high-level overview of navigating the complex landscape of tactical asset allocation.

Throughout this guide, we will delve into the fundamental concepts of tactical asset allocation, including its underlying principles, the importance of asset allocation in overall portfolio performance, and the factors that influence tactical decision-making. 

Then we will explore different tactical strategies and discuss the benefits and risks of each approach.

Whether you are looking to refine your existing tactical asset allocation strategy, are considering implementing this approach for the first time, or are thinking about outsourcing your investment research and management to an OCIO, this guide should help your research and thought process. 

We will review eight chapters related to Tactical Asset Allocation:

  • Introduction to Tactical Asset Allocation
  • Strategic vs.Tactical Asset Allocation
  • Fixed Income Tactical Allocation
  • Tactical Allocation between Value and Growth Stocks
  • Tactical Allocation between Large and Small Cap Stocks
  • Tactical Allocation between Domestic and International Stocks
  • Tactical Allocation between Traditional vs.Alternative/Private Investments
  • How an OCIO from Cornerstone Can Help You Become More Efficient


How about partnering with an OCIO to improve your RIA efficiency?  Be sure to read our latest Quick Guide here!

Chapter 1

Introduction to Tactical Asset Allocation

Consider your options. Your principal could serve as your chief investment officer.

That’s a tall order, though. They’ll need a skill set capable of juggling investment solutions, trading, estate planning, and more.

You could hire someone for the role. However, without deep pockets, this option may be out of reach.

On the other hand, you could outsource your CIO. Many TAMPs and SAMs are eager to take lots of your money, as well.

As markets become more volatile, independent Registered Investment Advisors (RIAs) need effective strategies to navigate various market conditions and meet their client’s investment expectations. One such strategy that has gained prominence in recent years is Tactical Asset Allocation (TAA)

TAA is a dynamic investment strategy that allows RIAs to position client portfolios according to the anticipated performance of different asset classes or the overall market. This approach involves adjusting asset allocation in response to economic or market conditions to exploit short-term investment opportunities for potential gain.

Fundamental principles of TAA include:

  1. Flexibility: TAA allows RIAs to make strategic decisions that may enhance returns or reduce risk based on the market’s current and projected performance. This includes the ability to overweight or underweight certain asset classes as necessary.
  2. Market Timing: The ‘market timing’ concept is central to TAA, to time entry and exit from various asset classes to exploit cyclical economic changes and market inefficiencies.
  3. Risk Management: TAA can be an effective risk management tool, as it allows for adjustments in portfolio composition based on perceived risk levels in different market segments.
  4. Diversification: While TAA may increase or decrease exposure to certain asset classes, it maintains diversification as a core principle, recognizing its importance in reducing non-systematic risk.

The benefits of TAA for RIAs include:

  1. Potential for Enhanced Returns: RIAs can exploit profitable investment opportunities by tactically adjusting asset allocations due to short-term market inefficiencies or disruptions.
  2. Risk Mitigation: TAA can shift investments away from riskier assets when market conditions are unfavorable, potentially protecting portfolios from significant realized and unrealized losses.
  3. Active Management: TAA gives RIAs an active role in portfolio management. This proactive approach can attract clients who want their investments monitored,  managed, and protected.
  4. Client Customization: The flexibility of TAA allows RIAs to tailor investment strategies to individual client goals, risk tolerance, and time horizons, providing a personalized investment experience.
  5. Market Responsiveness: TAA allows RIAs to react swiftly to changing market conditions. This can provide a competitive advantage in volatile markets where quick reactions can significantly affect investment outcomes.

However, it’s important to remember that TAA requires considerable expertise, as poor timing decisions can lead to subpar results.  Also, it typically involves higher transaction costs due to more frequent trading, which must be factored into potential net gains. 

Lastly, while TAA can help protect against downside risk, the strategy can only partially reduce risk, and losing money is still possible.

Chapter 2

Strategic vs.Tactical Asset Allocation

Strategic Asset Allocation (SAA) and Tactical Asset Allocation (TAA) are two key methodologies used for portfolio management. SAA is a long-term investment strategy that establishes a base policy asset allocation. It determines what percentage of a portfolio’s assets should be distributed across various asset classes, such as equities, fixed income, and cash, based on expected rates of return for each. 

This allocation is determined based on an individual’s current circumstances, investment goals, risk tolerance, and horizon. Once set, the portfolio stays put except for periodic rebalancing to maintain the initial asset allocation.

TAA, on the other hand, is a more active approach, allowing investors to deviate from their initial asset allocation to capitalize on unique or short-term investment opportunities. It involves more frequent adjustments to the asset mix in response to changing market or economic conditions. This approach requires more hands-on involvement and is based on forecasts or predictions for the performances of various asset classes.

strategic asset allocation checkers

To summarize, SAA is more about setting and maintaining a portfolio’s overall investment mix based on long-term objectives. At the same time, TAA allows flexibility to adapt to short-term market or economic conditions changes to enhance returns or reduce risk.

Chapter 3

Fixed Income Tactical Allocation

Fixed-income tactical allocation is a dynamic investment strategy where investors adjust their positions in fixed-income securities based on economic conditions, interest rates, or credit risk changes. It involves selectively shifting allocations between different types of fixed-income assets such as government bonds, corporate bonds, municipal bonds, and other types of debt instruments.

Unlike strategic allocation, which remains consistent over a long period, tactical allocation is active and flexible, allowing investors to take advantage of potential short-term investment opportunities or lower their risk profiles. 

For example, an investor might increase allocation to short-intermediate government bonds during economic downturns for their safety and shift to high-yield corporate bonds during economic upturns with declining interest rates for higher returns.

The goal is to enhance portfolio performance and manage risk. Still, it requires a deep understanding of financial markets, economic indicators, and the interaction between different types of fixed-income securities. The associated costs and tax implications must be considered as it can involve more frequent trades.

In essence, fixed-income tactical allocation is an active management strategy that seeks to capitalize on market conditions and fluctuations to optimize returns for the fixed-income part of a portfolio. It forms part of a broader asset allocation strategy and is particularly relevant to investors who prefer balanced portfolios to reduce their stock and bond market volatility exposure.

Chapter 4

Tactical Allocation between Value and Growth Stocks

Tactical allocation between value and growth stocks involves the strategic shifting of portfolio weightings to take advantage of perceived differences in potential returns from these two broad categories of stocks.

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On the other hand, growth stocks belong to companies expected to grow at an above-average rate compared to other companies in their industry classifications. These companies usually do not pay dividends because they reinvest their earnings to fuel future growth. Growth stock investments are focused on capital appreciation.

Tactical allocation is a dynamic investment strategy that involves adjusting allocations of value and growth stocks in a portfolio based on management styles and outlooks for the performance of the stock market, various industry groups, and individual securities. For example, a financial advisor may decide to increase the weighting of growth stocks during an economic expansion. Growth stocks are expected to outperform value stocks during these market conditions. Conversely, value stocks may perform better during volatile market conditions due to lower P/Es.

This strategy aims to maximize returns and minimize risk by taking advantage of the performance of value and growth stocks under different economic conditions and markets. It requires market knowledge, experience, and the willingness to make frequent adjustments in response to changing market dynamics.

By employing tactical allocation strategies between value and growth stocks, RIAs can capture potential opportunities and manage risk more effectively.

Chapter 5

Tactical Allocation between Large and Small Cap Stocks

Tactical allocation involves shifting investment allocations between large and small-cap stocks based on their future market performance. 

Large-cap stocks are shares of established companies with a market capitalization of $10 billion or more. These stocks typically provide more stable returns, higher dividends, and lower volatility, making them suitable for more conservative investors. 

On the other hand, small-cap stocks are shares of companies with market capitalizations between $300 million and $2 billion. These stocks have higher growth potential and increased risk.

Registered Investment Advisors (RIAs) can benefit from this strategy because it is a more proactive approach to managing their client’s assets. By tactically allocating between large-cap and small-cap stocks, RIAs can capture growth opportunities during market upswings and protect principal during potential downturns by moving to safer, large-cap stocks. 

This active management approach allows one to outperform the market and deliver improved risk-adjusted rates of return. Additionally, it allows RIAs to demonstrate their expertise and value to their clients, building trust and strengthening client relationships.

Chapter 6

Tactical Allocation between Domestic and International Stocks

In the Domestic and International Stocks context, tactical allocation refers to strategically adjusting the allocations of domestic stocks (headquartered in the U.S.) versus international stocks (headquartered outside the U.S.)  based on various economic, geopolitical, and market outlooks.

Investors use tactical allocation to exploit global investment opportunities and market inefficiencies. All of the best companies are not headquartered in the U.S., and companies headquartered in the U.S. may derive most of their earnings outside the U.S. This is the definition of a global economy. 

Regarding domestic and international stocks, the tactical allocation can be influenced by factors such as expected economic growth by country, currency fluctuations, changes in trade policies, geopolitical risks, and interest rate fluctuations.

For example, if economic indicators suggest more robust growth prospects in international markets, an investor might tactically increase the allocation of international stocks in their portfolio. On the other hand, if domestic stocks are forecasted to outperform foreign stocks, a portfolio may be over-weighted with the stocks of companies headquartered in the U.S. 

Such an approach can enhance overall portfolio returns or reduce portfolio risk depending on the investor’s objectives. Tactical allocation requires significant market insight and timing for buys and sells, which makes it a more complex strategy than a static strategic asset allocation. 

Chapter 7

Tactical Allocation Between Traditional And Alternative Asset Classes

Traditional investments are publicly traded stocks, bonds, and cash equivalents in the context of traditional investments versus alternative and private placement investments. In contrast, alternative and private placement investments involve real estate, private equity, hedge funds, commodities, precious metals, and other non-traditional offerings.

In traditional investments, tactical allocation may involve shifting assets between sectors, regions, or asset classes based on market conditions. On the other hand, in alternative/private investments, the tactical allocation could involve choosing specific deals, sectors, or stages of investment based on a short-term view of market opportunities. It is also important to note a high percentage of alternative investments are less liquid than traditional investments.

alternative investments graphs

This strategy can offer several benefits for RIAs. Tactical allocation allows RIAs to optimize their clients’ returns by exploiting market inefficiencies, participating in short-term trends, and reducing the inherent risk of traditional asset classes. Investing in multiple traditional and non-traditional asset classes can help diversify portfolios, reducing overall risk. That’s because all asset classes do not react the same. 

In addition, incorporating alternative/private investments into the tactical allocation strategy can further diversify portfolios, often yielding higher returns than traditional assets while providing exposure to sectors not available through the public securities markets. 

However, RIAs should also consider the additional complexities, illiquidity, and potential for the increased risk inherent in alternative/private investments. When managed prudently, the tactical allocation between traditional and alternative/private investments can be a sophisticated tool for RIAs seeking to deliver robust, diversified portfolios to their clients.

Chapter 8

Boosting Efficiency of RIAs; Cornerstone’s OCIO Services

In today’s rapidly changing and complex financial landscape, independent Registered Investment Advisors (RIAs) are under extraordinary pressure to balance myriad responsibilities while consistently delivering competitive results to clients. Recognizing this critical need, Cornerstone’s Outsourced Chief Investment Officer (OCIO) services emerge as a game-changing solution for RIAs seeking to augment operational efficiency and bolster performance.

Cornerstone’s OCIO services strategically rearrange the administrative and investment duties that traditionally burden RIAs, permitting them to focus on vital aspects such as winning new clients and serving current clients. The OCIO implements a sophisticated, customized investment strategy that aligns with each RIA’s unique objectives, risk management strategies, and investment philosophy.

Cornerstone’s OCIO service provides unprecedented access to leading-edge market research, state-of-the-art risk management tools, and top-tier investment services, thereby providing improved investment decision-making capabilities. By integrating technology and robust analytics, the OCIO team ensures their RIA partners maintain a competitive edge in a marketplace teeming with competitors.

A distinct advantage of Cornerstone’s OCIO service is its continuous portfolio management and oversight. This ongoing management mitigates risks and optimizes performance through timely tactical management, ensuring its RIA partners remain focused on serving current clients and winning new clients. Connect with us today to learn more about our OCIO and research management capabilities.

Cornerstone Portfolio Research (“Cornerstone”) is an SEC registered investment adviser. Registration as an investment adviser does not imply a certain level of skill or training.  This publication should not be construed by any consumer or prospective client as Cornerstone’s solicitation or attempt to effect transactions in securities, or the rendering of personalized investment advice over the Internet.

The statements in this publication are the opinion of Cornerstone regarding Outsourced Chief Investment Officer (“OCIO”) services. These are not personalized recommendations and you should consider your own criteria when choosing an OCIO.

A copy of Cornerstone’s current written disclosure statement as set forth on Form ADV, discussing Cornerstone’s business operations, services, and fees is available from Cornerstone upon written request.  You should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice from Cornerstone or the professional advisors of your choosing.