Investment strategies

Strategic Investing - Active vs. Passive Management Approach

October 3, 2022
3 min read

If you’re just starting out investing, you might have several concerns. Do you have to monitor the stock market and make a move constantly? Do you need predictive capabilities to know when to sell or buy? Do you need to understand basic finance fundamentals even to begin? Well, we’re here to help you answer these questions.

A Strategic Investment Approach Can Minimize Risks

Investing involves risk. Plan and simple. That’s because you can’t predict what the future will hold. Will a given investment pay off in the long run, or will I lose? It’s because it’s similar to placing a bet. Especially when it comes to investment in the stock market, the return and principal value of investments will fluctuate as market conditions change. Because of political turmoil, current events, and the overall economy, various external factors come into play that no one can foresee, let alone react to proactively. 

This is why you have to choose thoroughly how to allocate your assets. A strategic approach helps manage the risks associated with investments. It doesn’t eliminate the risk of losing significantly if security prices decline; however, it’s a safer approach to handling your money.

Strategic vs. Tactical Investing

Consider a chess game or sports match that involves two teams. You’ll want to be able to play offensively and defensively to make the most of your moves. Investment is similar. You can invest in two ways: either strategically or tactically. Strategic investing is fundamentally passive, whereas tactical investing is active.

Strategic Investing

Strategic investing is designed for an investor’s long-term goals. This involves creating and maintaining a portfolio that mixes various assets to reach those goals. Ideally, you don’t want to put all your eggs into one basket by having some versatility in your portfolio. As a result, you minimize dealing with heavy losses.

The most common type of strategic asset allocation is 60/40, i.e., 60% of the portfolio consists of stocks and 40% of bonds.

While this approach simplifies the diversification concept, it also has its emblem. Bonds are called upon to balance periods when stocks don’t grow as expected.

In the recent past, this has proven effective in the mid-to-long term, thanks to low-interest rates and average yields above inflation.

A strategic allocation can have guaranteed profits in a low-risk environment and leaves room for rebalancing your portfolio since different asset classes perform at various levels.

One of the main reasons to opt for strategic investing is because you can ensure investment disciple with a given asset allocation. After all, with the right strategy, you can focus on the long-term without being overly influenced by temporary market fluctuations.

Tactical Investing

Tactical investing means actively responding to market fluctuations and constantly searching for investment opportunities. Because you’re going on the defensive, it tends to maximize your portfolio’s performance. However, this approach can be time-consuming and very risky.

Still, many investors choose this route because a tactical investor will try to rework the composition of their portfolio as a way to manage their risk exposure or to take advantage of new opportunities and some short-term wins.

How to Choose the Right Approach

Choosing the right approach has to consider a few variations. This includes expertise, your goals, timeline, and overall risk tolerance. 

You should consider strategic asset allocation when:

  • You’re new to the world of investment. As a newcomer, the less you play the game, the better.
  • You’re up for buying and playing the game of holding onto your investments and letting the market do its thing; 
  • You tend to reach with your emotions. A pre-set allocation limits irrational decisions;
  • You’re looking for long-term returns. 

You should consider tactical asset allocation when:

  • You have plenty of experience as an investor;
  • You’re able to make rational decisions under pressure. Your mind controls your decision-making more than your heart;
  • You’re looking for some quick wins and fast results. 

Strategic Asset Allocation vs. Bear Markets

At its core, strategic investing is about diversification. It’s putting your hands into various pockets to minimize your risk in the long term. 

For example: historically, bonds have almost always increased when stocks have experienced bear markets. So a bond is a great way to manage stock market risk. Moreover, by owning both stocks and bonds, an investor would be somewhat prepared for bear markets while balancing with bull markets. Thus, having assets split between the two minimizes severe losses.  

Of course, bonds aren’t full-proof. They also carry risks such as when an economy is facing inflation or a spike in interest rates. Yet, bonds tend to behave differently from stocks. 

Tactical Asset Allocation vs. Recession

We’ve recently heard a lot of the “R” word, and only time will tell if we ever fall into a recession. Tactical investing benefits dynamic decision-makers who can rely on their financial and trading expertise to identify and seize opportunities during troubling times.

For example: let’s say a recession does occur. Then, a tactical asset allocator might decide to sell their stocks and increase their cash or fixed investment allotment by selling stocks and buying bonds. This tactical approach attempts to protect shock investments from possible value losses in the near future.

Risks in Tactical Allocation

Whereas strategic investing could be suitable for amateurs, tactical investing is more big-league action since it involves a more advanced investing strategy. Some of the cons to choosing this route include:

Paying higher taxes due to short-term capital gains.

  • Paying higher investing costs.
  • Spending a lot of time reading and researching the part, monitoring the market, and taking action. It’s a (potentially tedious and) time-consuming approach.

Does Peccala Allocate its Asset Strategically or Tactically?

As a company, we focus on tactical investing as we invest in crypto futures and rebalance our portfolio hourly.

However, we'd like users to see their investment in Peccala's investment strategies as short-to-mid-term, more strategic than tactical investments. So we encourage users to stay invested for at least six months but hope they keep their investment for around two years. It’s one of the best ways to see the most significant return on investment.