What is Tactical Investing?
Tactical Investing is a particular way of managing a portfolio. The idea behind tactical investing is that I do not diversify my portfolio in the traditional sense (by holding different asset classes over the long term) in order to reduce my risk. Instead, I diversify my risk over time. What does that mean? I assess the market daily on the basis of various measures (especially volatility) of current general market risk. I then adjust my portfolio accordingly. The metrics give an indication of how the market thinks volatility will be in the coming days. An example of such a metric is the price of hedging options. The more expensive they are, the more likely it is that the market will move sharply. Based on this information, the ideal ETFs (asset classes such as stocks, bonds, gold, etc.) can be identified depending on the current level of volatility. To illustrate, I show you the historical standard deviation of the S&P 500 stock performance over the following 2 days after calculating the market volatility. The latter is given as a value between 0% (low expected volatility) and 100% (high expected volatility). It quickly becomes clear that market volatility provides a good basis for estimating expected fluctuations.
As a small investor, I have a clear advantage over large investors. I can trade very dynamically. I can move my entire portfolio in a matter of seconds. That’s why I am invested on a daily basis in the most promising ETFs at the moment. And then we let the law of large numbers work its magic. Over a longer period of time, this allows me to ride out most major bear markets. In the long run, this gives me a huge advantage. I will show you an example of what such a strategy might look like in the next section.
How can a Tactical Strategy look like?
To illustrate, I have set up a strategy that holds an ETF on the SMI during periods of low to medium expected volatility. During periods of higher expected volatility, I stay in cash. And during periods of very high expected volatility, I am invested in gold.
It is particularly easy to see that in the Corona Crash of 2020 I suffered significantly less loss than the SMI itself. The warning signs were high during this period and I was invested in gold throughout. In this way, I am able to use the buy-and-hold approach to achieve much better results over longer periods of time. I avoid most major periods of losses and benefit from periods of extended bull markets. It also allows me to use leveraged products without the devastating losses that come with them. In the same example, you can see what the result would have been if I had used a 2x SMI product. On the one hand, the losses would have been higher, but because I was able to keep them under control, the end result is still significantly better. This is an option for people with a higher risk tolerance.
Summary
In summary, the Tactical Investing principle is a particularly promising way to invest. It not only takes into account the possibility of investing in the most promising ETFs. It also focuses on better managing an investor’s risk tolerance. This means that I am much better protected in times of high uncertainty than in a buy-and-hold portfolio. As a result, I can pursue this strategy over the long term and not, like many investors, abandon it at exactly the wrong time.