Asset allocation is the decision about how to distribute investment capital across broad categories of assets — equities, fixed income, cash, real assets, and alternatives. It is widely considered the single most important determinant of long-term portfolio risk and return, with research suggesting it explains the majority of the variation in returns across portfolios over time.
In a market timing context, tactical asset allocation refers to shifting the mix between asset classes based on signals about relative valuation or market conditions — moving from 100% equities toward bonds and cash when conditions are unfavourable, and back when conditions improve. This is distinct from strategic asset allocation (a long-term target mix maintained through rebalancing) and is the mechanism by which most systematic timing models express their views.
The challenge of tactical allocation is the same as all timing: the decisions about when to shift and by how much must be correct enough, often enough, to overcome the transaction costs, tax drag, and opportunity cost of being underinvested during recoveries. Most research suggests that simple, infrequent rebalancing of a strategic allocation outperforms discretionary tactical allocation for most investors — but systematic, rule-based tactical models with long track records represent a legitimate alternative for those who understand the trade-offs.