As we discussed earlier, there are two parts to asset allocation. Strategic asset allocation should be designed to help you meet your lifetime objectives, at the level of risk with which you are comfortable. Tactical asset allocation can take advantage of short-term investment opportunities to enhance returns, but only if you make the right investment decisions! Tactical allocations should be considered and comprise relatively small proportions of your portfolio, so that a large proportion of the portfolio is not chasing returns from one stock market or asset class to another.
Tactical asset allocation takes place within ranges around the strategic weights. Your portfolio can benefit from short-term tactical asset allocation, because of the mis-pricing that occurs in all asset classes. As asset classes gain momentum, so prices become over or under-priced, given the underlying fundamentals. Therefore, tactical asset allocation can exploit over and undervalued stocks and asset classes. There have been plenty of examples of asset bubbles, for example, including equity markets in the late 1990s.
If you believe prospects of a particular stock market or asset class are bright, then you may want to invest more money over the short term, to take advantage of this outlook. But as we said earlier, this should only comprise a small proportion of your portfolio.
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