Using tactically managed strategies to mitigate risk
Tactical money management has been in vogue since 2002 (after the last big stock market crash). Some advisors are big fans of tactical money management, some don’t believe in it, and some use both tactical and passive strategies for clients. Far too many advisors exclusively use a buy and hold/MPT platform.
What is a good definition for tactical money management? Some use the term “active money management.” It’s an investment style where the managers have developed algorithms or indicators that tell them when the stock market is getting risky. When the indictors signal the market is getting too risky, most of the managers will go to cash or move money to AGG (U.S. Aggregate Bond Index).
When the stock market starts an upward trend and if the tactical managers, due to the indicators or algorithms that think the trend is sustainable, they will move money back into the market to partake in the upside growth.
Does it work? Well, some say it works until it doesn’t, but there are several good tactical managers out there who have a proven track record of mitigating downturns while still generating an acceptable rate of return over time (there are also others who have not proven their signals work on a consistent basis so do your due diligence).
The following is a drawdown chart from an interesting tactically managed strategy from July 2000 to January 2011. You’ll initially notice that there is only one larger drawdown over the time frame instead of two and that the severity of the drawdown is much less.
The point of this website is to help get the word out to advisors not only about tactical money management as a viable platform to help their clients, but also about the use of a tactical overlay on passive investment strategies.
Advisors who use indexes such as the SPY in a portfolio, the question is would clients pay 35 basis points for a tactical overlay for what is essentially stock market crash insurance?
We think the answer is yes and we encourage all advisors to sign up to learn more about the tactical overlays discussed on this site or about creating a custom overlay for your passive investment strategies.