This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.
I walked outside after the awesome Landon Donovan World Cup goal and heard the following comment: "He was lucky-just happened to be in the right place at the right time!" Um, no...he was exactly where a striker should be, that is, attacking the opposing team's goal and following up on his teammate's attempt.
The killjoy who uttered the "lucky" comment surely knows nothing about soccer (for the record, I know a little something, since I played soccer in in my youth and in college), but he reminded me of a refrain that I've often heard about individual investors: they should stick to "buy and hold" because reallocating portfolios relies on market timing, or luck.
For once and for all, can't we put this concept to rest? Yes, every investor needs to understand her risk tolerance and create a diversified portfolio that meets her long term needs. But there are moves to make on a periodic basis (monthly/quarterly) that can improve performance. While you shouldn't be trading daily or even weekly, there is no reason why individual investors, or their advisors, shouldn't employ a tactical allocation plan that seeks to harvest opportunities in a variety of asset classes.
The way to use strategic allocation is to create a basic plan and then shift the percentages allocated to a given class, based on economic and market conditions. Here's the way to think about it: wouldn't you assume that at certain points in the business cycle some asset classes are likely to outperform or underperform others? Why not shift your allocation accordingly? I know that this may seem like too much trouble, which is fine-you can stick to a fixed percentage in the big three-stocks/bonds/cash-as your assets of choice, but know that doing so may rob you of potential risk reduction or performance.
Tactical asset allocation isn't based on luck, or being in the right place at the right time-it's based on hard work (usually in the form of education and research) and discipline, which can pay terrific dividends. You know, kind of like Landon Donovan's goal advanced the team into the next round.
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Jill Schlesinger is the Editor-at-Large for CBS MoneyWatch.com. Prior to the launch of MoneyWatch, she was the Chief Investment Officer for an independent investment advisory firm. In her infancy, she was an options trader on the Commodities Exchange of New York.