Dynamic and tactical asset allocation to manage the overall risk of your investment portfolio.

All of our Model Portfolios use asset allocation techniques to manage the overall risk of an investment portfolio. But not all appoaches to asset allocation are the same. We use the most up-to-date and advanced approach -- dynamic asset allocation (otherwise known as "tactical" or "active" asset allocation). Read this page to understand why you should care.

Asset Allocation is for Managing Risk

The science of asset allocation can be based upon either a fixed approach or it can be dynamic.

Traditional Asset Allocation: The traditional approach to asset allocation involves setting fixed, or static, allocations of your portfolio between different asset classes or investment types. Traditionally, an investment advisor will consider stocks, bonds, real estate and cash as the primary types of asset classes. Using asset allocation, advisors will recommend how much of your total investment portfolio should be allocated to each asset class or type of investment.

The fixed asset allocation approach has proven somewhat effective in moderating overall portfolio risk. The strategy works by incorporating a mix of different asset classes with low statistical correlation ... whose price movements tend to be out of synch with each other. The hope is that your various investments won't all be going up or down in value at the same time.  If they do not, then you have reduced the risk of a large loss in your portfolio.

• Importantly, asset allocation also works by reducing your allocation in historically volatile asset classes such as stocks.

Fixed asset allocation is fundamentally a passive approach. It is based on an academic theory which says that markets are "efficient" and that the price movement of investments cannot be predicted. However, the weakness of the passive asset allocation method is this ...

• At most times over the life of the portfolio, certain assets in the allocation will be seriously underperforming. This simple fact results in a severe inefficiency. The approach doesn’t take the market conditions of any asset class into account.

• Traditional asset allocation presents the investor with a difficult tradeoff ... reducing long term returns in order to reduce short-term risk.

A "Dynamic" approach to asset allocation

can increase returns and also reduce portfolio risk.

The practice of dynamic asset allocation (also called tactical or active asset allocation) has grown in recent years due to the success of various computerized market timing techniques in analyzing market trends. These new technologies typically don’t predict future market movements as much as they identify changes in trend direction and evaluate the risk of changes in a trend. They are good at following the market's trends tightly and reacting quickly to changing conditions.

With this advanced technology, the asset allocation practitioner can respond dynamically to the market and significantly increase risk-adjusted return over time by:

• Avoiding bear markets and periods of under-performance in the various asset classes--either by reducing or eliminating the allocation of the under-performing asset (e.g., getting out of the market).

• Increasing the allocation of asset classes currently in bull markets that are over-performing.

Therefore, dynamic asset allocation eliminates the key weakness found in the traditional, fixed approach that routinely allows periods of under-performance. The portfolio mix of our generic Model Portfolios will shift dynamically over time to avoid periods of under-performance and move into investment types that are performing well. The net effect is reduced losses, lower volatility, higher average returns and a much stronger risk-adjusted return.

A higher allocation in stocks drives much stronger long-term returns.

The dynamic approach to asset allocation has the inherent ability to tolerate a higher allocation to volatile asset classes such as stocks without increasing the riskiness of your portfolio. This is true when the asset allocation program is driven by advanced market timing technology that can react quickly to changes in market trend.

• If you can quickly exit the stock market before a bear market can hurt you, why not hold a higher allocation when stocks are performing well and out-performing other asset classes?

The truth is that trends become evident in the markets on a regular basis ... and the trends tend to persist for a period of time. Higher portfolio allocations to the more volatile asset classes can be managed safely in a dynamic approach when a trend can be identified in the asset and a safe exit point can be determined at the time the trend ends.

More efficiently capture changes in sector performance

A passive approach to asset allocation doesn’t allow you to take advantage of periods when Small cap stocks, for example, out-perform Large cap stocks or vice-versa. Active asset allocation gives you this ability. You can even use a dynamic approach to capitalize on special asset sectors such as Energy, Precious Metals or International Stocks when they are hot.

Dynamic approaches to asset allocation are inherently more efficient than the traditional, fixed approach. They can significantly boost returns over time by quickly reacting to changing market conditions for various asset classes and sectors, capturing periods of over-performance and avoiding periods of under-performance.