And when tactical moves don’t work, the damage can be long-lasting. Second, because markets can be so unpredictable, relying on specific market signals over short periods of time can be challenging over the long term-which is exactly what TDFs are designed for. First, to add value, a tactical approach must overcome implementation costs, including bid/ask spreads, commissions, etc. These active management approaches may seem like a sensible way to navigate short-term market movements, but it involves an inherent market-timing decision that is difficult to get right consistently.
They incorporate tactical or dynamic tilts into their asset allocations. Some investment managers, including those of certain competitor TDFs, aren’t completely sold on SAA. Any changes to the SAA that are approved by our Strategic Asset Allocation Committee must then be approved by the Vanguard Global Investment Committee and Vanguard’s board of directors, both chaired by CEO Tim Buckley, prior to implementation. This committee consists of senior leaders from Vanguard’s investment management and advice businesses and is led by our global chief investment officer and global chief economist. Recommendations to maintain or change the SAA are presented to Vanguard’s Strategic Asset Allocation Committee, which oversees all our multi-asset funds. During this process, Vanguard’s oversight of its SAA considers new asset classes, currency exposures, home bias, regulatory impacts, investment costs, investor behaviors, and implementation factors, among others. To ensure that Vanguard’s latest and best thinking is reflected in our Target Retirement Funds, a comprehensive review of the SAA is conducted annually. VANGUARD’S OVERSIGHT OF ITS STRATEGIC ASSET ALLOCATION (SAA) TDFs serve a large and diverse investor population, many of whom are defaulted by retirement plans into TDFs, so we believe it’s important to minimize additional risk wherever possible. And importantly, it adds a degree of active management risk. However, tactical shifts made with the expectation of exploiting short-term market moves is much easier said than done. It seeks to take advantage of market trends or economic conditions by actively shifting a portfolio’s allocations across or within asset classes. This approach aims to systematically exploit perceived inefficiencies or temporary imbalances in values among different asset or sub-asset classes. In contrast, tactical asset allocation encourages adjustments to a portfolio’s asset mix based on short-term market forecasts. We believe this is the most prudent way for TDFs to achieve their long-term objective of allowing investors to retire with some assurance of sufficient lifetime income.
This strategic approach should remove the temptation to make tactical adjustments when markets are roiling. Our philosophy rests on the evidence that a sound investment strategy starts with an asset mix built on reasonable expectations for risk and return and uses diversified investments to help avoid exposure to unnecessary risks. Vanguard Target Retirement Funds employ this strategic approach to bolster financial well-being for those saving for retirement. Strategic asset allocation involves setting target allocations across various asset classes and rebalancing the multi-asset portfolio regularly to stay close to the assigned allocation through all market conditions. Strategic asset allocation and tactical asset allocation are different methods to maintain a multi-asset portfolio.
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