The following are in response to Nancy Opiela’s article, Tactical Asset Allocation and Market Timing: What's the Difference?, which appeared last week:
Thank you for the article.
Market timers seek their return from active management by outguessing the next price move without regard to the economic business fundamentals of the underlying asset being traded; whereas the asset allocator is seeking a substantial portion, if not all, of their return from the economic activity of the underlying assets. Tactical asset allocation may or may not involve market timing, depending upon the reasoning behind the trading decisions.
The difficulty coming to a common definition of market timing is twofold: 1) there is a stigma attached to the term “market timing,” both because it connotes speculative day trading and due to its connection to the mutual fund trading scandal (involving Putnam, et al.); 2) the people being asked to define market timing often have not done it.
Like many things, it is not so much what done does, but why one does it.
Jeff Cheesman, Managing Director
Westwood Capital Partners LLC
I enjoyed reading Nancy Opiela’s article addressing the perceived difference between market timing and tactical asset allocation. As a founding executive of Rydex Investments, we took it upon ourselves to formalize and distinguish a number of different asset allocation approaches. This was a necessary exercise which led to the success of product development, positioning and servicing.
At a high level, we created two camps 1) strategic asset allocation (SAA) and 2) dynamic asset allocation (DAA). With SAA, the customer’s investment profile, including risk tolerance, income requirements, etc. determines the look and feel of the portfolio. SAA, also known in some circles as “set it and forget it,” includes moderate rebalancing, usually based on a calendar and not an event.
On the other side of the spectrum you have DAA, which allows the market and its movements to determine the look, feel and activity of customers’ portfolios. Taking DAA to a more granular definition, there are three very distinct disciplines 1. Market Timing, which is a 100% movement from a single asset class to cash and back within any time frame; 2. Tactical Asset Allocation (TAA), which is the allocation of capital in multiple percentages between multiple asset classes within any time frame; and 3. Sector Rotation, or actively allocating among numerous industry groups following the domestic/global business cycle.
While these definitions are broad in context, they serve as a very useful communication tool at all levels within the investment community.
Robert M. Steele
Bishop Asset Management
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