Building your investment portfolio: A guide to tactical asset allocation

As you build out your investment portfolio, it's important to understand the different tactics you can take, from a more passive strategy to a hands-on approach. If you want to play a proactive role in managing your investments—and potentially reap greater returns—tactical asset allocation might be right for you.

A tactical approach to asset allocation is all about adjusting your portfolio in response to short- or medium-term market conditions and economic forecasts. You change how your assets are distributed to capitalize on potential market trends. Unlike static or strategic asset allocation, which maintains a fixed mix of assets over the long term, tactical allocation allows you to shift the composition of your portfolio based on perceived opportunities and risks.

While tactical investors have the opportunity to enhance their returns, it's important to note that they also face more complexities and risks because their success relies on accurately predicting market movements and effectively timing the market.

Because tactical investing is influenced by market conditions, it can be applied to a wide range of investment types—although the assets selected still will depend on the investor's objectives, risk tolerance and investment strategy.

These are common tactical investments, based on the market opportunity:

Stocks represent ownership in companies and are known for their potential for capital appreciation. Tactical investing might involve over-weighting or under-weighting specific sectors or industries based on economic conditions and market trends.

Bonds are debt securities issued by governments, municipalities and corporations. A tactical approach to the bond market could mean you include different types of bonds (government bonds, corporate bonds, high-yield bonds) in your portfolio based on interest rate expectations, credit risk assessments and economic indicators.

Cash and short-term instruments like money market funds can provide liquidity and safety. A tactical approach might be to hold more cash during periods of market uncertainty or reallocate to cash during market downturns.

These include physical assets like gold, oil, agricultural products and metals. Tactical allocation with commodities might involve taking advantage of supply-and-demand dynamics, geopolitical events or inflation expectations.

Direct property ownership, real estate investment trusts (REITs) and real estate-related funds are all options when it comes to real estate investing. Tactical allocation could include adjusting your investments based on interest rate movements, property market trends and economic conditions.

These include hedge funds, private equity and other nontraditional investments. Tactical allocation here might mean making changes based on market volatility, liquidity considerations and specific investment opportunities. Be aware that many alternative investments are illiquid, meaning it may be difficult to reduce or sell these positions in response to tactical trading opportunities.

Tactical allocation can involve currency trading or hedging to take advantage of currency movements. Investors might pursue different currencies based on anticipated exchange rate fluctuations.

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It can be helpful to walk through potential advantages and disadvantages with your financial advisor as you build your portfolio. Talk through these three factors before you dive in:

Tactical investing can offer potential benefits such as enhanced returns and risk management, but it also comes with challenges like market timing risk, higher complexity and increased transaction costs and taxes. Investors should carefully weigh the pros and cons against their own investment goals, risk tolerance and ability to actively manage their portfolios.

To be a successful tactical investor, you'll need to conduct thorough research and analysis, have access to reliable market data, develop a well-defined strategy and take a disciplined approach to decision-making. You likely have a trader-like investing profile and will relish getting elbow-deep in the investment choices you make.

A tactical strategy will require a vested interest on your part, but you can decide exactly how involved you want to be. Discretionary tactical asset allocation puts the decision-making on you, the individual, while systematic tactical asset allocation leans more heavily on algorithms and trading systems to make these decisions for you. Moves may be made by the company you entrust with your portfolio.

A tactical approach is one of many ways to manage your financial portfolio. It's a more hands-on version than strategic asset allocation. While both begin with an initial ratio and allocation of assets, a tactical strategy is more open to adjusting that ratio to capitalize on market trends.

What's right for you? Your Thrivent financial advisor can help you analyze your risk tolerance, time horizon and ultimate financial goals and match you with the most fitting asset allocation strategy.