For RIAs and IARs, navigating the complex investing world can be challenging, especially when facing where to put your clients’ assets. One of the key decisions you and your clients will make is allocating the assets between domestic and international stocks.
This process, known as tactical asset allocation, forms the backbone of any active investment process. In this blog, we will explore the importance of tactical allocation between domestic and international stocks and the role of geographic diversification.
Read our newest Quick Guide, “An RIA’s Definitive Guide to Tactical Asset Allocation.”
Tactical Allocation between Domestic and International Stocks
Tactical asset allocation involves actively managing an investment portfolio to capitalize on market inefficiencies and economic opportunities. It is a dynamic strategy that involves adjusting the allocation of assets in a portfolio based on short-term market outlooks.
The concept of tactical allocation between domestic and international stocks centers on optimizing returns and managing risk by investing your clients’ assets across different geographical markets. These markets often behave differently due to economic, political, and social variations.
For instance, when one market performs poorly, another may thrive. By tactically allocating your clients’ assets, you can invest in countries and companies that are more stable with increased potential for producing premium returns.
The Role of Geographic Diversification in Tactical Asset Allocation
Geographic diversification plays a pivotal role in tactical asset allocation. It’s all about putting your eggs in multiple baskets to improve returns and minimize your clients’ risk of large losses. By investing in both domestic and international stocks, you spread your risk across multiple markets and economies. This strategy can reduce risk and open the door to additional investment opportunities.
Here’s how geographic diversification can impact your clients’ portfolios:
- By spreading investments across various geographical locations, you can mitigate the impact of a negative event in one country or region. This is because different markets are influenced by various macroeconomic factors and risks (political, economic, currency, etc.), which are unlikely to affect all regions simultaneously. Geographic diversification using tactical asset allocation involves spreading investments across multiple countries to manage risk and actively adjusting these allocations to exploit a broader range of investment opportunities.
- Geographic diversification allows investors to tap into growth opportunities in different countries or regions. Certain markets may have higher growth rates due to economic development, favorable demographics, or technological innovation.
- We live in a global marketplace, but the performance of markets can still vary across geographies. For example, while one country’s equity market might be experiencing a downturn, another might be in a growth phase. Or, one country is raising interest rates while another may maintain or lower rates. By diversifying geographically, advisors can take advantage of these differences on behalf of their clients.
- Investing in different geographies also creates exposure to various currencies. Exchange rates can positively and negatively impact returns, thus adding another way to diversify investments.
- Different regions provide a broader range of investment opportunities. For instance, the US might be robust in tech, while Germany is strong in autos. By diversifying geographically, investors can benefit from exposure to the best companies regardless of where they are headquartered.
How to Allocate Assets Tactically between Domestic and International Stocks
Allocating assets tactically requires a keen understanding of global markets and a responsive approach to making investment decisions. Consequently, we constantly monitor global market trends and economic indicators that impact particular countries. Following are a few processes you can use to make tactical asset allocation decisions for your clients:
- Regularly monitor global market trends and economic indicators. Look for factors such as GDP growth rates, inflation, political stability, and monetary policies that can impact future market performance.
- Diversify your portfolio across different geographical markets. However, diversification doesn’t mean spreading your investments evenly. Your allocation decisions should align with your expectations for future performance and exposure to country-by-country risk.
- Tactical advisors regularly review and rebalance their clients’ portfolios. Tactical allocation is not a set-it-and-forget-it strategy. It requires constant vigilance and adjustments based on changes in outlooks.
- It can be beneficial to seek advice from an OCIO specializing in tactical asset allocation and security selection. Many OCIOs use complex algorithms to develop optimal asset allocations for the clients of financial advisors.
Cornerstone Insights: Some companies are headquartered in the U.S. and derive most of their revenues from outside the U.S. Some companies are headquartered outside the U.S. and derive most of their earnings from inside the U.S.
How Can RIAs And IARs Benefit From Using An OCIO?
The most significant benefit of an OCIO is access to its expertise and time. This can be particularly beneficial for smaller RIAs and IARs who need help to employ a full-time, in-house CIO with the expertise to deliver competitive rates of return.
- OCIOs can assist in creating both strategic and tactical portfolios. While strategic allocation is based on long-term investment allocations, tactical allocation responds to short-term changes that impact market outlooks. Global OCIOs are not limited to domestic investments that have particular characteristics. A flexible approach is extremely important for producing competitive rates of return.
- Research and portfolio management require substantial time and resources to do it right. In particular, this is true for portfolios that rely on tactical asset allocation to produce results. These portfolios can require constant monitoring and frequent adjustments to produce competitive rates of return for clients. By outsourcing this function, you can focus on other aspects of your business, such as financial planning, client service, and business development.
- OCIOs should have sophisticated risk management tools and analytics to identify, track, and manage your clients’ portfolios. This can provide an added layer of protection for your clients, helping to ensure their portfolios align with their risk tolerances and investment objectives.
- Many OCIO services can be tailored to the portfolio management services and style you currently employ at your firm. Whether your firm needs assistance with just a portion of the portfolio or requires a comprehensive investment management solution, an OCIO can provide cost-effective solutions.
- Because investment management is heavily regulated, compliance can be complex and time-consuming. OCIOs are well-versed in regulatory requirements and can assist in ensuring that your firm’s investment practices are in full compliance.
The team at Cornerstone Portfolio Research provides highly customized investment research and portfolio management services to independent RIAs and IARs. We invite you to connect with us to learn more about our services.
