Longer-term investments with a short-term boost

Typically, an investor taking a strategic approach will be looking at the long-term, while tactical investors will be interested in short term gains from investing in large swings in equities. However, one approach involves splitting investments between these two forms of investing.

With a strategic investment strategy, investors tend to buy and hold a similar investment class percentage over a period of years based on their appetite for risk. The timescale for tactical investing is much shorter and as such, requires more involvement more regularly.

A blend will take elements of both these approaches. One example of a split that could be made through this sort of strategy might be someone with an eye on early retirement who regularly keeps, say, 60% of their invested assets in equities and 40% in fixed income, spreading their risk. As such, their portfolio may require rebalancing of target weights every quarter or half-year to keep the asset allocation aligned with the long-term goal.

Defining your approach

“A strategic time horizon can stretch from a couple of business cycles to decades,” John Ricciardi, head of global asset allocation at Merian Global Investors tells Opto. “That depends on age, revenue and the liquidity demand of the investor. 

Ricciardi says that in order to balance risk, strategic portfolios tend to be diversified by including equities from various sectors and regions. “It’s wrong to call them defensive, because they are structured based on risk profile,” Ricciardi says. “You can have growth strategic funds based on that appetite.”

“It’s wrong to call them defensive, because they are structured based on risk profile. You can have growth strategic funds based on that appetite” - John Ricciardi, head of global asset allocation at Merian Global Investors

A stocks and shares ISA is a very common way to invest strategically, incorporating a range of funds in order to gain exposure to markets such as the FTSE 100, specific sectors such as technology or industrial, or regional equities including emerging markets.

Strategic investors tend to base their decisions on historical data and past returns over a number of years, taking this as an indicator of likely future performance.

“For a 50-50 asset allocation of global equities and bonds you will tend to get a 4% or 5% return a year,” says Ricciardi.

Tactical investors, on the other hand, are much more hands-on. 

“For a 50-50 asset allocation of global equities and bonds you will tend to get a 4% or 5% return a year” - John Ricciardi

They will be more proactive when it comes to making changes to their portfolio, reacting to market or economic conditions, underweight and overweight stocks and attempting to profit from emerging sectors.

For example, an investor might want to buy more small-cap companies rather than large. In this way, they may be looking for rapid growth potential. This could mean that while 50% of their holding in stocks remains the same over time, they are willing to make riskier plays with the remainder of their portfolio.

Tactical and strategic investments: practical examples

Ricciardi, more commonly participates in tactical trading.

“We make decisions over the quarter and even day in and day out, when it is really volatile, with the intention of outperforming passive benchmarks over the cycle,” he explains.

He goes on to explain that of a selection of about 30 stocks, maybe one will get changed every six months and two a year. 

“An example of factors would be overweight in small caps to outperform and enhance return. Or [we’d] model the macrocycle, looking at output and inflation. When you’re heading to a rise in both, then it’s helpful to pro-cyclical assets such as materials and energy and industrials. When you have low inflation and output improving, then real estate, healthcare and consumer staples do better,” Ricciardi notes.

Other metrics Ricciardi is looking at include dividend yields, prices to cashflow and earnings yields compared to bond yields.

“We try to base the majority of the investments in our portfolios as strategic, typically with a 5–10-year time horizon,” Thomas Watts, investment analyst at Cumberland Place tells Opto. 

“Developed geographical regions such as Europe, the US and to some extent the UK we see as core to our portfolios and look to hold them for the very long term. Funds that have the flexibility to invest across sectors and market capitalisations are usually more favourable for us as the underlying manager has the mandate to invest in the different opportunities as they arise.”

“Funds that have the flexibility to invest across sectors and market capitalisations are usually more favourable for us as the underlying manager has the mandate to invest in the different opportunities as they arise” - Thomas Watts, investment analyst at Cumberland Place

Watts highlights the firm’s gradual move into smaller UK companies and domestics in the first half of 2019, “when the Brexit situation was becoming clearer,” as a good example. “We have since looked to sell down such positions as the euphoria fades,” he explained.

Watts explains that on the rare occasions Cumberland Place does take a tactical position, it would be in the form of a tracker “offering cheap, efficient exposure to the desired market”. After the Brexit Referendum, Watts says, Cumberland Place bought a simple FTSE 100 ETF when the market hit 5,500 and sold it when the market hit 6,200, which was within a matter of days.

“I would say thematic sectors can be the most effective for tactical and strategic investments,” Watts says.

“I would say thematic sectors can be the most effective for tactical and strategic investments” - Thomas Watts

“ For example, we believe in technology, whether it be e-commerce or automation and want to hold such exposure in our portfolios over the longer term,” he states. “Areas such as natural resources, which are often more volatile, lend themselves to be tactically traded in and out of. However, we try to keep this to a minimum.”

The upsides and downsides 

Both investment methods hold their fair share of risk. A strategic investor may hold for too long and get caught up in a prolonged downturn. A tactical investor could, in turn, get their bets and calculations wrong and get caught out by a stock that performs unexpectedly badly. The costs of making many regular trades can also add up.

Furthermore, neither the strategic nor tactical approach has more inherent merit than the other. Instead, it depends on what an individual is like as an investor. For example, how much risk an individual wants to take on, or how much active they want to be in given market will affect their outlook. Furthermore, some individuals may want to get really granular and to be heavily involved in the details, while another may prefer to take a longer-term approach and hope that their long-term strategy can weather economic storms.

By blending elements of both, an individual could hope to achieve a best of both scenario. In doing so, they may still maintain some of the supposed security of a longer-term strategy while also capitalising on potential short-term benefits that tactical investing could bring.