Tactical investing is when you change a portfolio’s asset allocation from time to time based on what’s happening in the markets and economy. For example, you might reduce stocks after they’ve had an extended rally or reduce bonds when interest rates seem about to rise. This article points out that tactical investing isn’t for everybody and probably is more important for people who are near retirement or in the early years of retirement.
While many of the variables in the retirement equation can be influenced by the investor (e.g. savings rate and withdrawal rates), some – like the market return – are entirely out of their control.
Worse, the actual sequence of returns – not just the long-term rate – can have a material impact on an investor’s experience. A 50% portfolio loss the year before an investor retires will have a large effect upon their safe withdrawal rate, and therefore the lifestyle they can afford to lead. That is sequence risk.
But sequence risk is not a constant throughout an investor’s lifecycle. Understanding when sequence risk peaks may be critical for establishing optimal financial plans in the future.