What is the purpose of tactical asset allocation?

Tactical asset allocation is a dynamic investment strategy that involves adjusting a portfolio's asset allocation percentages in response to changing market conditions. The primary aim is to capitalize on perceived market inefficiencies, which often leads to shifting investments from overvalued assets to those considered undervalued. This approach allows investors to optimize returns by taking advantage of short-term market movements and trends.

By moving investments from sectors or assets that are believed to be overpriced to those that appear undervalued, investors can enhance their portfolio's potential for growth. The effectiveness of tactical asset allocation relies on timely decision-making and the ability to accurately assess market valuations, thus directly linking its purpose to the concept of realigning investments based on market assessments.

Other choices, while related to portfolio management and investment strategies, do not reflect the core objective of tactical asset allocation. For instance, maintaining long-term fixed investments pertains more to a buy-and-hold philosophy rather than active management. Minimizing transaction costs focuses on reducing trading expenses but does not encompass the goal of adjusting asset allocations based on valuation. Lastly, global diversification, while beneficial in reducing risk, is distinct from the tactical strategy of reallocating between specific asset classes based on market conditions.