I was reading an article in a financial magazine dealing with advanced topics. I like to think that I cover complex topics like QLACs, but I usually scratch the surface. I’m fine with that. I don’t have any professional training. If you are going to use complicated financial tools, it is probably best that you have a professional advisor and maybe a tax expert.
However, the particular article I was reading wasn’t that complex. The idea was you might want to consider a tactical tilt of your asset allocation. I had never heard of the phrase “tactical tilt,” but I’ve been doing it for some time.
What is a Tactical Tilt
Let’s pretend you have a very simple asset allocation: 80% US stocks and 20% US bonds. A tactical tilt could be to recognize that stocks have been doing well. Perhaps the valuations are high. We know when valuations are high by looking at the Shiller PE. If valuations are high, you might want to sell some stock and buy some bonds.
If this sounds like rebalancing your portfolio, that’s because that’s exactly what it is (in this case).
One example of a tactical tilt is what I did in late January 2020. I sold a lot of the tech-heavy Vanguard Total Index and bought the high-dividend fund HDV. I wanted to secure a decade of gains but still remain invested. I couldn’t have seen that COVID was coming, but when it came, HDV barely dropped compared to the other stocks that crashed. There are enough boring consumer staple companies in HDV that helped it stay high.
Here’s another example. In late May of 2022, I started buying technology stocks – specifically the QQQ exchange-traded fund. Here’s what I wrote at the time:
Over the last couple of days, I’ve been selling off very small amounts of bond allocation and my high-dividend ETF (HDV). I’ve been able to buy shares of QQQ (Nasdaq Cubes) at an average of $300 a share. At the start of the year, a share of QQQ would have cost me $400. If I had $4000 to invest back, then I would have been able to buy ten shares. Now, I’m getting 13 shares with an extra $100 to spare.
I’m not trying to call a bottom of the market. I have no idea where that is. I will dollar-cost average as it goes lower. I have a lot of confidence in companies like Apple, Microsoft, Amazon, and Google. I know that they’ve gotten very expensive over the last decade. That’s one of the reasons why I removed some tech risk from my portfolio a couple of years ago. Now is a chance to buy tech at a discount.
I ended up buying some shares as low as $280. Thanks to the AI boom last year, QQQs are currently trading at $421 a share. The tactical tilt worked perfectly.
I’m the first to admit that I got lucky. I couldn’t have predicted COVID or the ChatGPT craze months in advance. I knew that I never wanted to get out of the stock market completely.
Isn’t Tactical Tilting Timing the Market?
I view tactical tilting as similar to rebalancing your asset allocation. When you rebalance your asset allocation, you are reacting to how the markets have performed in the past. For example, if you owned QQQ before and it’s trading high now, it probably has too much of your asset allocation now.
When I tactical tilt, I’m often thinking about possible or probable future trends. When one asset class is high, there is usually another asset class that isn’t feeling the same kind of love. That is unless you are talking about TINA.
When most people talk about timing the market, they talk about exiting the markets and holding cash instead.
I don’t time the market in that sense. I always want my money to be working. I just may want them working in different places. Sometimes I want more stocks, and sometimes I want more bonds (as described by my rule of 20, but everything I own in a brokerage account should at least be trying to earn a 5% over the long-term.
Finally, I should mention that I only do this in my retirement accounts. In those accounts, I don’t have to worry about the tax consequences of a sale. In regular, non-retirement accounts, I typically take the dividends in cash and reinvest them in areas that I would normally tactical tilt in.
So Where Would I Tilt Now?
I don’t feel as strongly as I did with the previous two examples.
It seems to me that Vanguard’s Emerging Markets (VWO) is priced cheaply. However, I have been invested in emerging markets for ten years, and they have lagged behind the US markets. Just before publishing this article, I read that China’s slowing economy could spread to surrounding emerging markets. So maybe keep your eyes on emerging markets.
Another idea is the solar fund TAN. It’s trading at 1/3 of its 2021 highs. I don’t think solar is going away. This Yahoo Finance article explains why solar did poorly in 2023 and why it might be great in 2024. TL;DR? The high interest rates are bad for solar companies and lowering interest rates should be good.
Another place I’m looking at is oil stocks like Exxon and Chevron. They have been down a bit as oil prices are low. The United States is making a lot and keeping the prices down. Those companies do a lot better when the price of oil is high. With various wars breaking out, maybe some oil-producing nations will run into problems that limit supply, which would drive the price up.
Do you tactical tilt your asset allocations? Let me know in the comments.