Tactical Asset Allocation (TAA)
The term tactical asset allocation refers to an investment approach that actively adjusts the allocation of assets in a portfolio. Tactical asset allocation involves the continual rebalancing of the mix of investments in a portfolio to take advantage of pricing anomalies.
ExplanationTactical asset allocation, also known as TAA, refers to an active investment strategy that adjusts the allocation of assets in a portfolio. The objective of this strategy is to outperform the risk-adjusted returns associated with a passively managed portfolio. This is achieved by attempting to take advantage of pricing anomalies in each market.
From a practicable standpoint, tactical asset allocation occurs in two ways:
- Systematic TAA: uses sophisticated quantitative investment models to identify and take advantage of temporary pricing inefficiencies and marketplace anomalies.
- Discretionary TAA: adjustments are made to the allocation of assets in an investor's portfolio based on perceived pricing inefficiencies and marketplace anomalies.
The success of this approach depends on a number of factors, such as the investor's knowledge of the markets, risk tolerance, and their ability to effectively monitor a variety of asset classes.