The terms “strategic” and “tactical” have their origin in warfare, though are now commonly used to describe actions in business and sports.
The key distinction here is that the former refers to an overarching, long-term effort whereas the latter refers to a more specific action performed in the service of this larger strategic goal. In other words, a strategy is a larger, overall plan that can comprise several tactics, which are smaller and focused actions under the overall plan.
How does this distinction apply to investing?
An investment strategy generally refers to a consistently executed long-term plan. For example, a mutual fund that routinely invests in stocks its fund manager believes are underpriced may be said to employ a value strategy. Or a bond fund that invests primarily in securities that pay above-average yields may be said to use a high-yield strategy. This is also referred to as the core strategy.
While maintaining this as the core strategy, the fund manager may see opportunities that are short-term in nature but have the potential to increase returns. This is called a tactical approach. Such moves may be based on what the manager thinks is happening or will happen in the markets and typically are aimed at boosting gains.
Here are a few examples of moves that could be considered tactical:
- An international bond fund manager who thinks bonds from a given country are temporarily underpriced reallocates assets in that direction.
- A multi-asset fund manager may be concerned that a correction is around the corner and shifts a chunk of assets from the equity side of the portfolio to the fixed-income side.
- An equity fund manager may believe an uptick in infrastructure stocks would take place and may decide to focus a part of his portfolio on a few such stocks.
- A value fund manager may latch on to a few growth stocks for the short term because a strong rally is on.
Tactical moves are not commonly applied to stave off losses, they are essentially short-term moves will add alpha to the fund without affecting the fund manager’s overall strategy.
Although there's no official line of demarcation between strategic and tactical investing, the distinction between acting with a near-term and long-term mind-set is as good a guideline as any. A manager who opportunistically adjusts his fund's allocation based on what is likely a temporary change in the market is making a tactical move. One that makes such a shift with the intention of sticking with the new allocation for many years could be said to be making a strategic one.
Of course, some fund managers tactically reallocate assets more than others. Some may see it as an essential part of their overall approach, others may not give it that much importance.
On a personal front, an investor too can employ a tactical approach. Let’s look at bond funds for instance. Longer the maturity of the bonds in a portfolio, the higher its duration; the higher the duration, the more sensitive is the bond’s price to the fall in interest rates. So debt funds with a shorter duration of a year or so can be used for a strategic allocation. The long duration funds can be a tactical allocation.
In equity too such tactical allocations can be made, however do remember that should you sell before a year, your investment will be subject to short-term capital gains tax.
