MyPrivateBanking Blog
Daily Comments on the World of Wealth Management

The Tactical Asset Allocation Game

It’s this time of the year again when private banks, investment banks and wealth managers around the world send out their forecasts and “tactical” asset allocation recommendations for the coming year. And so my inbox has been flooded by Citi, BofA, UBS, Nomura and many others over the last days. As always it is hilarious how a strong consensus seems to exist as to how the future will exactly play out: Economic recovery is continuing, equities will be strong, forget (mostly) about bonds, emerging markets are continuing to be a great opportunity etc. etc. The overall conclusion seems to be: Clients should move out of bonds into equities.

Of course, there are some banks which have minor disagreements. A few even warn that the party in Emerging Markets has gone a little too far. Almost two years ago, at the peak of the global financial turmoil, MyPrivateBanking has visited in a mystery shopping experiment the biggest European Private Banks to get a investment proposal. The overwhelming majority of banks recommended not to invest in equities at all or to put only a very low portion of the portfolio into equities. Even though our mystery shopping client showed medium to high risk appetite the private bank advisers would try to talk him into an extremely low risk portfolio - exactly when the market hit rock bottom.A deadly mistake which became obvious when the market turned later in 2009.

This remains the crux of every market forecast and tactical asset allocation (others call it plainly “market timing”): banks do not know the future. They never have and they never will, just like any other market participant. The only thing they do is following a broad consensus - largely in line with the herd behavior drawing conclusions based on the (immediate) past. Therefore, tactical asset allocation usually is a sucker’s game for private banking clients: you’re either late or wrong. Our advice: Just stick to your personal asset alocation - don’t try to time the market.