Tactical Portfolios
Building Portfolios for Market Volatility
Beaumont has more to offer than traditional investment management - we also have tactical portfolios on our menu. While separately managed accounts are appropriate for many investors, tactical portfolios are another option for investors to consider.
How does Tactical investing differ from Strategic investing?
Strategic investing traditionally entails a buy and hold philosophy where a portfolio allocation will stay invested through both bull and bear markets. Tactical investing provides the ability to sell positions, raising cash, in an effort to lower risk and reduce losses during a prolonged market downturn.
The Cycle of Market Emotions
Buy and hold portfolios assume that over a long period of time the stock market will go up. It also assumes that investors are “rational” and won’t panic during bear markets, resulting in their selling their investments.
Conversely, in managing tactical portfolios we understand that investors may have shorter time horizons, making it unfeasible to weather an extended market decline and wait for the recovery. We also realize that investors have emotions and are wired to avoid pain – and losses are painful.
Built for Bull and Bear Markets
Combining these features—the ability to sell and become defensive, reduce investor emotions, and use of private markets—produces a portfolio seeking to work better for investors in both bull and bear markets.
Tactical Overlay
We enhanced conventional buy and hold asset allocation portfolios by adding a tactical overlay driven by fundamental and technical investing principles.
Lower Volatility
This allows the portfolio flexibility to sell positions and raise cash “defensively” during bear markets attempting to reduce large losses and lowering the overall volatility of the portfolio – minimizing investor emotion.
Blend Portfolio
Our tactical portfolios blend traditional, publicly available investments with private markets in a single portfolio. This is done in an effort to provide an opportunity to increase returns and diversification, and lower overall risk (volatility).
Conceptualizing Key Components of Tactical Investing
Trend Following and Market Breadth are two key concepts considered in managing our tactical portfolios.
What is trending today may not be trending tomorrow
Trend Following is an approach of looking at, in this case, the 200-day moving average of an (equity) index. This is a widely used technical indicator that helps assess the long-term trend of that index. Trends with a positive (upward) slope are considered bullish, while a negative (downward) slope is considered bearish.
A positive trend indicates the portfolio should stay invested in an attempt to capture gains, conversely to sell positions where a negative trend signal is indicated to help limit larger losses during a long-term bear market.
The graphics at left show examples of what an uptrend and downtrend may look like, with the 200-day moving average being the dark blue line in the middle of the light blue trend channel.
A Way to Identify Healthy Versus Unhealthy Markets
It sounds complicated, but Market Breadth is simply the number of stocks participating in a market move opposed to those that are not. Essentially, it is a technical indicator that helps determine if a market rally is broad-based (including the majority of stocks in the index) and sustainable, or if there are a few large stocks doing very (pushing the index higher) well while most other stocks in the index are lagging. In healthy markets, most stocks should be going up with the overall index and market breadth is high (increasing); in an unhealthy market most of the securities in an index stop advancing and the market is carried higher by a few stocks and market breadth is low (declining).
You can see in the charts to the left how a healthy market (on the left) is increasing while the market breadth (top left) is also increasing. While the chart on the right shows an unhealthy market increase while the market breadth (bottom right) is declining.
Combining Market Breadth with Trend Following
Unhealthy Market
The goal is to sell portfolio positions and to raise cash more aggressively as both the market breadth is negative, and the overall market breaks the uptrend. This points to the potential for a major market top forming and a potential longer-term bear market.
Healthy Market
With positive market breadth, we would look to sell the portfolio positions and raise cash more moderately when the overall market breaks the trend channel, as the probabilities point to a short pullback/correction and the eventual continuation of the longer-term uptrend.
Beaumont offers Tactical Portfolios with seven allocation choices
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