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Strategic Versus Tactical Investing

When it comes to investing, one of the biggest questions in my mind is strategic versus tactical management. Before we can discuss the merits of one or the other, I think we should clearly define both.

Strategic management focuses a financial portfolio on a group of assets.

Tactical management changes the asset classes of a portfolio depending on the economy.

So, which is better? In theory, tactical management sounds wonderful. You get in when the market is low and out when it is high. Unfortunately, this does not consistently yield the maximum returns to investors. Correctly guessing the exact moment to jump in and out of the market can have definite rewards. However, the key word is “guessing.” And, I believe guessing what will happen in the market is far riskier than just staying in. And I am not alone. The facts back me up. Just look at this 20-year financial study published in Money Magazine in August 2008:

Carla Fried analyzed the Standard and Poor’s 500 Index from 1982 to 2001. She discovered that $100,000 invested in the stock market in 1982 and left alone would have grown to $930,000. This is nearly a 10-fold increase.

What if you missed just the best 10 days? Carla’s study shows your portfolio would be cut nearly in half, totaling $560,000. If you missed the best 30, it would have dropped to $280,000. And if you missed the best 50 days, it would have gone down to just $150,000.

A financial advisor’s attraction to tactical management is understandable. It is extremely difficult to feel those losses. Yet, those who ride the ups and downs consistently come out ahead. Keeping your money in the market, even when things look bleak, means you don’t have to guess about what will happen in the market. I think guessing should be better known as betting. After all, there is a reason Las Vegas stays in business. When it comes to my financial future, I believe in calculated risks not hopeful acts.

 

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I want to hear your opinions; please leave a comment below and let me know your thoughts.

 

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