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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  1. i summarised:
    1.asset allocator- who balances between different assets at predetermined level on predecided imbalance
    2.day trader- going with market trend , and remains mostly in cash at end of the day , dealing with one asset class
    3.market timing investor- switching completely from one asset to other more lucrative asset at predetermined level
    am i correct?

  2. Few request/suggestions,

    1. How about some posts on various kind of accounting mal-practices done by Indian companies ? Explained in a manner in which individual direct equity investors can understand.

    2. I always wished there was a book which can put the famous book ‘Intelligent Investor’ in Indian perspective with Indian examples as far as possible. Seeing the kind of readership the original IE book has in India i would be surprised if such an endeavor doesn’t get good response. I guess it will require a lot of experience to put that book in Indian perspective.

    Regards

  3. if i have to wish, how about somebody like subramoney would start investment company as warren buffet’s for indian investors?

  4. Thanks. Too late i guess 🙂 Also the fund management industry compensates the sales guy better (far better) than the manager. I am not complaining, but the structure makes it difficult for research people (once upon a time we were a research company) and fund managers to be on their own…so blogging, writing and s….ing up my own finances is what i do. With help from a few friends on the buy side, seem to be beating the sensex and the nifty.

  5. I would leave “tactical asset allocation” responsibility to my mutual fund manager. 🙂 Why bother investing in individual stock when a person knows for sure that he is not Subra in terms of knowledge/research and in terms of picking up trends of future?

  6. Bharat, nothing humble, plain simple facts. What I cannot do, I cannot do.

    Sanjay, TACTICAL ALLOCATION can NEVER BE DONE BY THE FUND MANAGER, it is the portfolio manager who has to do it. So either do it yourself or find a portfolio manager who will do it for you!

    You can find a million people better than me in the market. I did not wait to be as good as a Vallabh Bhansali or a Rakesh Jhunjhunwala..then the wait is endless. Keep learning, keep investing..it is a never ending cycle..

  7. Subra,

    I see little diference between the traders and what you propose. Trying to time the market over micro or macro level has its own risk /reward. Best to keep investing for long term and keep asset allocation suitable for your age and risk profile.

    Who would have thought the market will go up to 22k before 2008? Those who sold out at 15k or 12k were left out.

    I think selling individual shares based on the fundamentals of that company is the correct way. With mutual funds, it is the selection of funds and keeping track of the performance.

    Regards

  8. In beginning of last year, somewhere around January 2010, Mint newspaper had published an article how few mutual funds managed through falling market — they sat on cash. At one point, 35% of their NAV was cash. And investment mandate had allowed them to do so.

    If I select a mutual fund which, as per investment mandate, is allowed to sit on 35% cash then I can hope that mutual fund manager will make right calls and cash-out and re-enter in market at right times.

    Btw, I dont earn so much to have a portfolio manager. In any year, I have not invested more than 3 lakhs (all assets combined excluding home loan.)

  9. For a retail guy, from a tax point, how does the tax department view one as an investor or trader / speculator? Are there well specified variables like – limit on the transactions, frequency of transactions, holding period, source of money etc.?

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