Tactical Update: Uncertainty Abounds

This seems an opportune time to review the difference between Strategy and Tactics.

Strategy and tactics are how we achieve our goals and objectives. In our specific case, the goals and objectives are financial in nature. Strategy is the path we will take to get from where we are today to where we want to be tomorrow; it is the big picture plan. In investing strategy is your asset allocation target, how you will allocate your resources across various asset classes to achieve the returns you need to meet your goals. Tactics are specifically and tangibly how we implement the strategy.

Strategy and tactics are often described and differentiated as long term and short term but that isn’t really accurate. The choices we must make on how to fulfill our strategic asset allocation – which investments we choose for each asset class – are tactical and long term. For instance, our strategic allocation – the Fortress portfolio – uses the S&P 500 for large-company stock exposure. That is a tactical decision that is long term. We make similar choices when constructing international or global versions of the Fortress.

The other kind of tactical change, which is short term by nature, is one that changes the investments within the strategic allocation. These are the types of changes we make to our Citadel portfolios. We might observe conditions that are favorable to non-US stocks and decide to shift some of our large company stock exposure to Europe or Japan. Those types of tactical changes will last as long as the conditions that precipitated them persist which could be months or years.

Our tactical changes start with identifying the investing environment. We do this by classifying economic growth as positive or negative (we also consider the rate of change as best it can be determined) and the US dollar as rising or falling. We have identified investments that tend to perform well in each of four distinct environments (emphasis on tend).

US Dollar

The US dollar remains in a short-term downtrend however the rate of change has stalled over the last two months. There was a brief rally in September but it didn’t carry far and the index has recently pulled back.

The longer term picture shows the dollar still in the range of the last five years. It now sits on the uptrend line that starts way back in 2011. While I don’t put a lot of emphasis on technical analysis, a lot of currency traders do, so if we break that trend decisively, expect more selling.

The rate of change on the Dollar index is negative over 3,6,9 and 12 months. For that matter, the change over 1,2,3,4 and 5 years is negative, if only slightly. The short term trend is obviously down.

What does all this add up to for the dollar direction? Not much in my opinion. For now, I’d still call the short term direction down but the downtrend has certainly moderated. If you take intermediate to be 5 years then the trend is neither up nor down. Long term? Well, let’s just say it is stronger than it was around the crisis in 2008.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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