Recently, I have written about strategic and tactical asset allocation.
I want to say a little more about the tactical side.
I ended my previous column on asset allocation by saying that tactical allocation, done properly, must be based on more than emotions, panic, or simply giving up. Sadly, I see tactless allocation, more often than not.
Remember that anyone, even a professional manager, can get on a lucky streak. But even the top-performing managers don't outperform forever.
Case in point: Craig Hodges is one of the most successful small-cap managers in recent years. I have interviewed Craig several times. I know that he's a smart guy, and a very careful stock picker, who bases his selections on thorough fundamental research.
A few months back, The New York Times ran a story about a study of 2,862 mutual funds. The study found that only two funds had beaten the S&P 500 over the past five years. One of those was the Hodges Small Cap Fund (HDPSX).
Here's the kicker, the Times' quote from Hodges:
"We won't do it all the time, of course," he said. "We'll have bad times. We'll make mistakes. But over the long run, I think we can keep doing very well."
The pros acknowledge that active management, at least in their particular asset class, won't be in favor all the time. Active, tactical allocation is not the best way to allocate into a retirement portfolio that you depend on for income. In that case, balanced growth or balanced income - boring, old indexing - is probably a better idea.
Finally, I've written before about a strategy that mixes tactical and strategic allocations: the core-and-satellite approach. Here, you use a core holding of stock-and-bond index funds. This mitigates risk, and helps ensure that you have somewhere to draw income, should you need funds when either the equity or bond market is in a downturn. You can allocate anywhere from 50% to 80% of your portfolio into core index funds.
The rest of your portfolio can be tactically allocated into asset classes that do well over time, such as small caps, value stocks, or emerging markets. You can also choose a sector whose prospects you like. Healthcare remains a popular sector choice, due in no small part to the increased spending by aging Baby Boomers.
The core-and-satellite approach (sometimes called "core-and-explore") allows you to take a flier when you perceive an opportunity, without putting your entire portfolio at risk.
The strategy that's right for you depends upon your level of interest in active management. Of course, readers of Real Money are very likely to take an interest in active trading or investment. The core-and-satellite method may be an ideal strategy, leaving some "boring" and reliable assets in your portfolio, while allowing for deliberate selections of stock or asset classes.
