Market Chaos and Your Portfolio
It has definitely been a rocky week since our last blog post. Since that time, we’ve seen:
- Friday – 02/02/2018 – DJIA Plunged 666 points (2.5%)
- Monday – 02/05/2018 – DJIA Plunges 1597 points before “recovering” to close down 1175 points (4.6%)
- Tuesday – 02/06/2018 – DJIA Futures Plunged 1,000 Points Overnight. Closed the Session Up 567 Points.
- Wednesday – 02/07/2018 – Trading is Still In Progress.
If you watched the happenings of the market on a daily basis, you might have felt your stomach churning just a bit. You may have even had some flashbacks to 2008-09. Understandable on both accounts. Whether you read our blog or visit our social media sites, you will see a common theme throughout: Know Your Plan and Stick to It.
First thing’s, first: Not everyone’s plan is the same. Nor should they be. There are often varying plans even within a given risk tolerance. If your plan is designed specifically for you, it should be tailored to your goals and risk tolerance. One of the many questions we revolves around the portfolio construction.
Two of the more popular allocations are Strategic and Tactical. While each takes into account your risk tolerance, they differ in how they work. We’re going to focus on the differences within these allocations.
Strategic Asset Allocation is based on Modern Portfolio Theory. Generally speaking, your portfolio is constructed with an asset mix that takes a long-term investment perspective to help achieve your goals. If you’ve ever heard of “Buy and Hold”, this is the general premise behind a strategic portfolio. These portfolios usually contain a mix of mutual funds, ETF’s and index funds. Depending on your arrangement with your advisor, the allocations are tailored either locally or using a third-party money manager.
Contrary to Strategic Asset Allocation, Tactical Asset Allocation utilizes an active portfolio management strategy that rebalances assets frequently and allows for short-term deviations from the model portfolio. In these allocations, the portfolio manager tries to benefit from short-term opportunities in order to either enhance returns or mitigate risks. Many tactical allocation managers utilize complex algorithms to dictate the investments held within a portfolio. Tactical allocations became very popular after the market correction (crash) of 2008-09 as a way to try to mitigate losses.
While there is no right or wrong way to allocated your portfolio, it is important to understand the difference in both Strategic and Tactical Asset Allocations. They will react differently in both bull and bear markets. With either scenario, when there is a bit of chaos in the market (like we talked about at the beginning of this post), it is important to understand your plan and continue to execute it.