Tactical asset allocation strategy (also known as Sector Rotation) is an active management portfolio strategy that rebalances the percentage of assets held in various categories in order to take advantage of current market conditions.
Investors who utilize the tactical asset allocation strategy generally want to hedge risk in a volatile market, whilst maximising profits. Once the desired short-term effect is achieved and the markets settle down a bit, the original asset allocation can be returned to.
Many systematic Tactical Asset Allocation strategies use quantitative Trend Following or Relative Strength techniques to produce excess investment returns. These both aim to capitalize on momentum, a well-known market anomaly.
Example:
- If stocks are dropping, and offering a good bargain price, it might be worth it to shift to more stocks in order to buy when valuations are low. Later, as valuations increase, you can shift your asset allocation, selling for profits since you bought while prices were low.