Adaptive Asset Management versus Tactical Asset Allocation

The Tactical Asset Allocation approach is similar to our Adaptive Asset Management approach. Both approaches try to increase the return on your investment by analyzing the market environment and using this analysis to modify your asset allocation. In the Tactical Asset Allocation approach, market analysis is used to determine whether to deviate and how much to deviate from a benchmark asset allocation. In many cases this benchmark allocation is the optimal passive/strategic asset allocation (i.e., 60% stocks and 40% bonds). In a market environment very favorable to stocks, an individual following this approach might increase the stock investment to 80% and decrease the bond investment to 20%. In a market environment that is not favorable to stocks, the stock investment may decrease to 40% and the bond investment may increase to 60%. Even in the most extreme market conditions, only relatively small deviations from the benchmark asset allocation may occur.

Our Adaptive Asset Management approach believes that small adjustments to your asset allocation may not adequately take advantage of a new market environment because shifts in the market environment could have dramatic effects on expected returns. Instead we try to adjust your asset allocation in parallel with the change in the market environment. Therefore, in a very positive stock market environment we may have stock exposure over 100% by using options. However, in a very negative stock market environment we may have a negative stock exposure, equivalent to a "short" position in stocks. The goal of the Adaptive Asset Management approach is to not just beat the performance of a benchmark target allocation, but to maximize your investment's performance.

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