Since the stock market bottomed on March 23, 2020, approximately 35 percent below the then-record high set on Feb. 19, share prices have moved pretty much in only one direction – up.
This has resulted in daily phone calls suggesting specific stocks. Quite candidly, many of these have risen quite dramatically which prompts the question “is this investment working because it was a well thought out choice or is it merely going up because all stocks, many quite speculative, are rising?”
Perhaps over the past few months you have heard the terms strategic as well as tactical investing or read articles comparing and contrasting the two approaches. Strategic investing, the most common portfolio management strategy, focuses on the long-term, is one that sets target allocations and rebalances portfolios when they “deviate significantly from the initial setting.”
It is one that rarely takes into consideration short-term fluctuations or anomalies in market pricing, relying on the historical benefits of remaining diversified over a full economic/market cycle, usually five to 10 years.
As asset managers, Fagan Associates mostly pursues a strategic approach to investing, choosing to focus on the long-term “climate” of the market rather than on the, nearly impossible to predict, day-to-day “weather.”
On the other hand and according to Investopedia, tactical investing “is an active management portfolio strategy that shifts the percentage of assets held in various categories to take advantage of market pricing anomalies or strong market sectors. This strategy allows portfolio managers to create extra value by taking advantage of certain situations in the marketplace.”
As noted above, we believe in and mostly pursue a strategic approach. If a percentage had to be struck, it would most likely be somewhere in the range of 75% strategic and 25% tactical. However, given the onset of the COVID-19 pandemic this spring and the resulting short-term opportunities, we became a bit more tactical without sacrificing the overall strategic nature of our investment procedure.
Herein lies the problem for many new investors – they are most likely pursuing a form of tactical investing with their ENTIRE portfolio, focused on the potential for short-term gains while not establishing any disciplines to deal with the associated downside risk. To date, this has not been an issue due to the overwhelmingly bullish move noted above. However, volatility cuts both ways and the good times will not last forever.
Even stocks that have strong, fundamentally sound long-term stories are vulnerable. Many could get cut in half without negatively impacting their long-term business potential. Those old enough may remember the bubble of the late 1990s. Disney, for example, peaked around $43 per share during May of 2000 before falling. It then took the company approximately eleven years to recover.
Another example, Amazon lost 80% of its market capitalization/share price in the year 2000, alone. Point being, even great companies can get overvalued and suffer dramatic declines.
For those with expertise, tactical investing generally complements strategic investing when managing portfolios. It is an actual strategy and is not picking up shares of companies that are going up and buying them just because they are rising.
That is a fool’s game. From a portfolio standpoint, we believe that there can be a place in everyone’s portfolio for “tactical” investing. It is just important to make sure that you do not over allocate your funds to this approach. As always, keep in mind that stocks can go down just as fast as they went up.
Plan for it.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, please call (518) 279-1044.