Introducing tactical asset allocation

Recently some industry experts have taken the position that a buy-and-hold strategy no longer works. In reality, a buy-and-hold strategy does work and works very well; however, it just does not work well in this economic environment.

If we look back to 1982, which was the dawn of a new Secular Bull Market, a buy-and-hold strategy was successful. Why? Because we were in a Secular Bull Market, which is a market that over a long period of time, say 15 to 20 years, trends basically up. There were Cyclical Bull Markets and Cyclical Bear Markets during this Secular trend but the overall long-term trend was up.

Let’s go over some of the basics that were the foundation of that economic environment. In 1982 we had very high interest rates that were on their way down. We had very high inflation that was on its way down. We had very high tax rates that were on the way down. Now you may not remember, but our Federal Income Tax rates were at record high levels. Citizens owned on average a greater percentage of their homes, saved more and borrowed less than we do today. The price-to-earnings ratio on the S&P 500 was under 10.

Where are we today?
Do you think interest rates are coming down?
How about inflation? Taxes?
Do you think the consumer will be taking on more debt going forward?
Do you think we will start to save more?

By the way, the price-to-earnings ratio on the S&P 500 is approximately 15. To us it does not seem like a great environment for the dawning of a new Secular Bull Market. Instead, we appear to be in a Secular Bear Market where the long-term trend is generally sideways to down.

As a result, we are still utilizing the risk profile to determine the appropriate allocation among the broad asset classes of cash, stocks, bonds and possibly alternative investments. However, we will overweight and underweight specific sectors/investments based on our analysis of the current environment. We will seek out opportunistic investments and those that provide downside risk.

Based on the changing economic environment we may be adjusting the portfolio on a more short-term basis. This strategy is certainly different than the traditional buy-and-hold strategy.

Therefore, it is part of our method to regularly update our clients’ risk profiles so that we may reallocate portfolios accordingly.