Strategic asset allocation (SAA) and tactical asset allocation (TAA) are different strategies that influence these percentages and how often you change them.
Passive investing vs. active investing. Balanced vs. growth. Bonds, property, equities and cash. All these terms are related to asset allocation, which is the percentage allocated to each asset class in your portfolio. Strategic asset allocation (SAA) and tactical asset allocation (TAA) are different strategies that influence these percentages and how often you change them. Here are the ins and outs of SAA and TAA to help you choose.
The definitions of Strategic Asset Allocation (SAA) vs Tactical Asset Allocation (TAA)
SAA is a long-term and passive investment strategy where rebalancing only occurs periodically.
TAA is an active management portfolio strategy where allocations are adjusted in response to market trends and economic conditions.
The differences between SAA and TAA
Summarised below are the differences between these two strategies and which one you choose will depend on your experience, risk appetite and financial goals.
STRATEGIC ASSET ALLOCATION |
TACTICAL ASSET ALLOCATION |
| Passive with a buy-and-hold strategy | Active with frequent trading |
| Ideal for generating returns over a long-term time horizon | Ideal for generating higher returns in the short-term |
Ideal for:
|
Ideal for:
|
| Typically more cost-effective | Typically more costly due to frequent trading |
| Better for emotional investors | Better for active investors |
| A balanced portfolio e.g. 60% in defensive assets and 40% in growth assets | A growth portfolio e.g. 25% in defensive assets and 75% in growth assets |
What is a defensive asset and what is a growth asset?
Defensive assets (also called income assets) are typically less volatile and generate long-term stable returns. Examples are fixed-interest assets like bonds or cash assets like bank deposits.
Growth assets are typically riskier but have the potential for higher returns. Examples are shares and property.
Choosing SAA or TAA for your portfolio:
Seeking investment advice from an accredited and expert Green Associates consultant can help you make the right decision, based on your personal circumstances.
Seeking investment advice from an accredited and expert Green Associates consultant can help you make the right decision, based on your personal circumstances.
Here are 4 questions as food for thought, so you can come to your first consultation feeling more informed and confident.
1. Are you a younger or older investor?
This affects your tolerance for risk and impacts how much time you have to recover any losses.
2. How much money do you have to invest?
SAA is typically more cost-effective and so it may be more suitable for you if you have a smaller balance.
3. How much time do you have to invest?
Maybe you have a timeframe in mind due to a big life event or decision. SAA is more focussed on the longer-term, while TAA; shorter-term.
4. Are you in a time when markets are relatively stable or volatile?
When markets are particularly unpredictable, SAA means your portfolio is more exposed to these economic conditions. TAA means you’re in a better position to capitalise on market conditions.
What about dynamic asset allocation?
This investment strategy falls in between SAA and TAA and continuously adjusts asset allocation to maximise returns in the medium term.
So, should I do SAA or TAA?
The winner of this battle depends on your personal circumstances, investing experience, risk appetite and financial goals. You might have a better idea of whether SAA or TAA is best for you after reading this article.
Take the next step in refining your strategy with qualified investment advice. At Green Associates, our investment advice and planning service, delivered in Canberra, Goulburn and Brisbane, helps you invest to make sure your hard-earned money is working for you.
Speak to our friendly team for a tailored consultation on 1300 815 921 or at info@greenassociates.com.au. At Green Associates, all of our advisers are fully licensed and listed on the ASIC Moneysmart Financial Adviser Register. Green Associates is committed to providing the best solutions for you and your wealth-creation journey.
