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Newfound Research: The Case for Tactical Asset Allocation


Is the “Long Run” Just Too Long?
Jeremy Siegel’s Stocks for the Long Run is one of the first resources to put hard numerical evidence behind the conventional wisdom of “buy and hold”. Going back as far as 1802, the author calculates a long-run average real return of 6.5 to 7 percent for equity markets.

While that rate is certainly compelling from a compounding perspective, an investor’s time horizon and many capital allocation decisions are not made over the “long run”. Many factors result in investment returns that skew from an academic view of long-averages such as:

  • A 40 year, or less, investment horizon
  • Dynamic investment contributions & income growth
  • Changing savings rates (5.7% at age 25 to 9.3% at age 55)
  • Shifting risk preferences as investors age
  • Dynamic liabilities (educations, mortgages, cars, etc.)

These factors mean that the order of market returns is perhaps more important than the long-term average in determining investment outcomes. In the short-term, markets can, and will be turbulent: The annual returns for the S&P 500 Index, on average, differ from the long- run average by 14%. The result? A historical 27% probability that $1 invested in the S&P 500 Index would be worth less than $1, in real- terms, ten years later. For example, in the graph below, we can see that $1 invested in almost anytime from 1965 – 1973 stood a good chance of being worth less than $1 a decade later. These are material risks that can steer everyday investors off-course, and don’t even consider the emotional turmoil caused by market volatility.

We believe that tactical asset allocation that can dynamically react to emerging risks in the market can help supplement diversification and deliver a more consistent risk profile. By smoothing out the volatility experience, TAA may enable investors to carry more risk generating assets within their portfolio, which can lead to increased total return over their investment lifecycle.

The remainder of this piece can be viewed at the following link: http://cdn.thinknewfound.com/wp-content/uploads/2014/05/The-Case-for-TAA.pdf?2bf0ef

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