How to damage your wealth in three easy steps! – Part 2

Part 2 – Tactical Asset Allocation

Part 1 of this series of articles dealt with the issue of financial advisers recommending that their clients enter and exit the investment markets at various times in order to gain advantage over other investors and ‘beat the market’.

We illustrated that this strategy is more likely to damage their clients’ wealth rather than add to it.

Tactical Asset Allocation

Numerous academic studies have proved that the main driver of long term investment returns is the way that investors divide up their money between various ‘asset classes’, i.e. different types of stocks, bonds and property.

This leads some investors and/or their advisers to engage in another form of market timing known as ‘tactical asset allocation’.

This means that the weighting between the various ‘asset classes’ would be amended on an ongoing basis depending on the adviser’s view of how the asset class may perform in the future.

In the same way as trying to time one’s entry into and exit from the market, ‘tactical asset allocation’ relies on trying to predict the future and is therefore destined to fail.

As an example, the following chart shows the rates of return achieved within various equity and bond markets around the world over the last 10 years.


The next chart rearranges the data in order to show the highest and lowest returns for each year.


We can clearly see that there is no pattern to the above chart and that different asset classes provide the highest returns in any given year.

We would therefore suggest that it would be unwise to adopt a strategy whereby one was allocating funds based on an attempt to predict the winning asset class.

How does BRB Wealth Management approach asset allocation?

At BRB Wealth Management, we adopt a split between the various asset classes based on hard evidence from data covering the last 40 years.

As an example, we can clearly demonstrate that tilting your stock market investments to ‘small’ and ‘value’ stocks is likely to increase long term returns relative to the broader stock market. We can also demonstrate that high quality, short dated bonds are likely to do a better job of controlling risk than lower quality, longer dated bonds.

In the absence of any new research identifying long term trends in the market, our recommended split between the various asset classes that we use will remain static. We rebalance the portfolio back to the original weightings on an annual basis.

Our asset allocation strategy will not be swayed by short term movements in the market and we will protect you from the urge to ‘do something’ in times of trouble.

Advocates of ‘tactical asset allocation’ would say that it is vital for a portfolio to be amended on an ongoing basis in order to reflect the rapidly changing world in which we live. However, this is only a valid viewpoint if it can be demonstrated that these amendments would improve investment returns. There is a huge weight of academic evidence that shows that it is virtually impossible to routinely add value by investing in this way.

The final part in this series will deal with the likelihood of adding value by selecting specific, outperforming stocks and demonstrate that there is no need to invest tactically and/or try to time the market in order to achieve the long term returns that you require.

Should you have any queries regarding any aspect of this article, please do not hesitate to contact us.