Finding the right balance between tactical, strategic allocation

Colin Low, principle and chartered financial planner at Kingsfleet Wealth, looks at market timing, and the associated debate between tactical and strategic allocation.

For a significant portion of an initial client meeting, we focus on understanding that individual’s attitude to risk, and just as importantly, their cashflow requirements over the coming years. We also take time to explain there are certain things we will never excel at, and, we would argue, very few really are good at – market timing for example, currency trades and using cash as a defensive tactical hold.

As yet, I have not found an investment strategist in the land who is capable of calling their market timing correctly on every single occasion. Let’s face it, if you get half of your calls right and half of your calls wrong then you have achieved very little. We are great believers in strategic asset allocation and ‘semi-outsourcing’, so we do not micro manage a portfolio.

We use global equity funds rather than pick specific regions (there are people who do this far better than us) and strategic bond funds rather than focused fixed interest mandates.

However, my biggest concern is the addiction that some have to holding cash within a portfolio on a tactical basis. I have heard of individuals whose advisers had moved them into cash in 2007 as the market had jitters regarding the first sign of trouble in the US housing market, which would ultimately lead us into the Lehman crisis of 2008. If they had needed the funds at any time over the course of the next five years, the timing would have been superb.

However, this was not the case and the portfolio, in many cases, is still in cash to this day. So, within an active portfolio, we see no reason to hold cash.

We approach portfolios with a strategic view, not a tactical view, firm in our belief it is in our clients’ best interests that we place their funds in the right location and in the hands of the right manager. If a client has a timeframe exceeding ten years, we will often use passive arrangements to reduce the portfolio cost.

Our adventurous investors have a more thematic bias in order to access demographic, socio-economic and cultural changes in the global economy, whereas our cautious investors have a more UK-centric focus, making use of funds in the Strategic Bond and Absolute Return sectors. 

We even have a reasonable holding within the Cautious Managed sector (now Mixed Investment 20%-60% Shares), as their day-to-day response to events is a protection for our clients.

A model balanced portfolio currently has 22% in global equities, 14% in UK fixed interest, 10% in property, 29% UK equity, 18% managed and 7% absolute return. Our most weighty issue at present is whether to maintain property at that level or to reduce to our lower limit of 5%.  

Colin Low (pictured) is principal and chartered financial planner at Kingsfleet Wealth

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