Tactical Asset Allocation

Asset classes are heavily influenced by the position in the cycle (growth and business cycle), inflation and inflation expectations, monetary and fiscal policies, real interest rates and yield curves, credit spreads, and market liquidity.

Comparing valuations and implied risk premiums between asset classes can provide signals for overweighting or underweighting. 

Investor flows and positioning may confirm or refute a trend, or signal fragility that makes the market vulnerable to a correction or reversal. Being aware of cognitive biases, herd behavior, and overconfidence can help you avoid disappointment. 

Excessive optimism should prompt caution, and conversely, excessive pessimism is often a buy signal. Follow sentiment indicators and measure over-/under-reactions.

All these factors must be considered together with factors specific to each asset class (e.g., the impact of COVID-19 on office real estate or geopolitics on commodities).

Tactical bets must be calibrated so as never to compromise (in the event of error) the objective of capturing the risk premium offered by risky assets in the long term. In other words: no wild bets.