What is tactical asset allocation? How is it even relevant for die hard BULLS like me who are 70% in equities in a down market and 97% in equities in a bull market?
Well Tactical Asset Allocation happens when you pull out some money from equity assets and keep that money in other asset classes like cash or debt funds. The asset class to which you shift is more as a ‘principal protection’ rather than to ‘earn’ a return. Which means it is perfectly all right for me to sell Hero Honda @ Rs. 2000 and stay in cash.
What return I get in cash is not a consideration at all – it is a matter of protecting one’s capital from a downside in the market.
Also tactical asset allocation (unlike Market Timing) is not a ‘All or None’ game. You can sell some equities which you think are fully priced, or sell some shares in one industry and keep some other shares in the same industry (like selling Ashok Leyland, but keeping Tata Motors) …and shift the sales proceeds to cash.
Market timing in investing also should not be confused with day trading. Day traders are always in the same asset class – say equities or one or two commodities. They do not shift from equity trading to commodity trading – they are day traders, NOT INVESTORS. The trader is largely indifferent to the stock or the index – he is just playing the momentum. In a bull market he gets an opportunity to buy and then sell. In a falling market he first sells and then buys! There is no asset allocation for a trader – in most cases at the end of the day he is in cash – or in some cases he is on a leveraged position.
Market timing in investing is a clear case of saying…’Now the market is at 21000, it is at a price earning ratio of 22, or some such trigger makes a person shift from say equities to another asset class like cash, gold, oil, etc.’
Here he/she is taking a call that the asset class which he is entering is the best – and will give a relatively higher appreciation vis-avis the other asset class!
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