Tactical asset allocation (TAA) is a term that refers to the strategy of identifying investment opportunities that are anticipated to yield a significant return in the short term. In order to take advantage of this opportunity to earn a hefty return quickly, the investor arranges or allocates funds to purchase shares and hold on to them long enough to realize the profit.
One of the easiest ways to understand how tactical asset allocation works is to assume that an investor has identified a stock option that is anticipated to increase in value over the next thirty days. After that period, the option is expected to go through a brief period of leveling off, then slowly fall back to the current market price. The investor allocates funds to purchase the shares before the increase takes place and holds on to them until the market value reaches a plateau. Just before the anticipated drop, the investor sells the shares.
When tactical asset allocations function according to plan, the investor makes money due to the increase of the value of each share held. By selling at just the right time, the investor also realizes a substantial return from the difference in the sale price and the earlier purchase price. A portion of the return can be set aside to invest in future strategies of this type, while the remainder can be used to acquire a promising long-term investment.
One of the beauties of tactical asset allocation is that the approach can work with just about any type of short-term investment opportunity. There are investors who favor applying the strategy to domestic investments only. Others find that employing a global tactical asset allocation process is an excellent way to increase the net worth of the investor.
In any case, an investor who wishes to make use of this type of investment process normally establishes a tactical asset allocation fund. The fund serves as the source for all revenue utilized to invest in any TAA deal. Some brokerage houses also offer these tactical asset allocation funds with a line of credit or a margin; courtesies of this type are usually extended to investors who deal in large investments.
As with any type of investment activity, the success or failure of a tactical asset allocation rests on choosing the right investment and accurately projecting the future performance of that investment. This means that there is a degree of risk with a TAA, just like any other investing opportunity. For this reason, the investor should explore any short-term opportunity closely before making any purchases.