Experienced investment professionals know that markets test seasoned allocators and investors, and that emotional reactions often undermine long-term plans. We see tactical investing as a practical solution.
This article explains how tactical strategies can reduce emotionally-driven investment decisions and help portfolios respond to changing market conditions through a rules-based, systematic, and disciplined investment approach.
The Benefits of Rules-Based Tactical Investing
Tactical investing is an active portfolio management approach that dynamically adjusts asset allocations in response to changing market conditions, economic data, or technical signals, without adhering to a fixed, long-term strategic mix.
Investing tactically may help calm emotions by dialing up equity allocation during desirable market environments and scaling back allocations and potential risk during undesirable market environments, such as major corrections and bear markets.
Tactical investing differs from traditional buy-and-hold strategies.
Unlike traditional buy-and-hold strategies, tactical investing seeks to capitalize on opportunities or manage risks by overweighting or underweighting asset classes such as equities, bonds, or sectors based on prevailing market trends, valuations, momentum, or macroeconomic indicators.
Systemized decision making
For allocators and sophisticated investors, rules-based tactical strategies can systematize investment decision-making through predefined, quantitative models and rules. Rules used by asset managers might include various technical indicators, volatility thresholds, valuation-based indicators, or economic surprise indices.
By following predefined mechanical signals rather than gut feel, these strategies can remove emotional biases like fear-driven selling during market crashes or greed-fueled chasing when some stocks go nowhere but up. This discipline can also reduce second-guessing and the constant hoping that the market will cooperate with your guess.
Trend and Momentum: Two Types of Tactical Investing
Two popular rule-based methods for tactical investing in US equities are trend-following and momentum strategies. Both help investors make decisions based on rules instead of emotions.
Tactical investing involves actively shifting money across different asset classes based on current market conditions, rather than maintaining a fixed long-term allocation, such as 100 percent equity or 60 percent stocks and 40 percent bonds, regardless of the market environment.
For many rule-based asset managers, this means they do not hold static allocations and instead adjust their portfolios dynamically to capitalize on opportunities or manage risk as markets move.
Note that not all tactical managers are rules-based or systematic. For example, a macro manager typically may evaluate broad economic trends, such as interest rates, inflation, GDP, and geopolitics, and then use personal judgment to decide equity allocations. This discretionary style relies on the manager’s interpretation rather than following predefined rules.
Trend following investing
Trend following in US equity strategies seeks to capitalize on trends in the US stock market, allocating as much as possible in uptrends and during bull markets, and minimizing allocations or staying defensive during bear markets.
The strategies may use tools such as moving averages, price breakout rules, and other technical indicators to identify when an asset shows an upward or downward trend. The approach is designed to stay invested or increase allocations when prices rise consistently, exit positions and move to safer assets when prices fall to predefined levels, and in some cases, position to benefit from market declines.
This method may potentially work for many asset classes, including US equities due to the long-term trends experienced during bull and bear markets.
Momentum investing
Momentum investing in US equities compares stocks or sectors to each other. The strategy seeks to identify investments that have performed best recently relative to peers, and to buy the stronger performers while reducing or avoiding allocations to underperformers.
Momentum strategies can be implemented in distinct ways. A sector rotation strategy, for example, is designed to look to shift more money toward the strongest-performing market sectors. A relative strength strategy is structured to rank securities against one another and allocate capital to those demonstrating the strongest performance compared to their peers, while a multi-horizon strategy is built to blend short-, medium-, and long-term performance trends into a single momentum signal.
Used together, trend-following looks to set the overall risk level, while momentum aims to help choose the specific areas most likely to drive returns.
Avoid emotional investing
Both trend following and momentum strategies look to help remove emotion from investment decision-making by relying on preset rules. The approach can help remove fear-driven panic selling during market drops or greedy chasing of hot assets. Instead of guessing or reacting emotionally, they look to follow objective signals.
Advisors, investment allocators, and high-net-worth individuals may benefit because the system removes the guesswork and the need to constantly predict how the market may move in response to various inputs.
Most investors recognize that predicting future market events is unreliable at best.
Rules-based systems do not eliminate risk, and they do not guarantee better outcomes in every period. They do, however, seek to manage risk and create a disciplined decision-making environment free of emotion-driven mistakes.
How Tactical Strategies Have Historically Performed
While past is not prologue, rules-based trend-following and momentum strategies have been created to capture sustained price moves and systematically reduce the influence of investor emotion. In practice, this has translated into distinct performance patterns across bull, bear, and sideways markets versus indices and ETFs that implement these approaches.
Tactical strategy performance in bull markets
Momentum results. One way to see how momentum has worked in strong equity markets is to look at the S&P 500 Momentum Index and the Invesco S&P 500 Momentum ETF (SPMO), which tracks that index.
The S&P 500 Momentum Index delivered a five‑year annualized total return of approximately 12.85 percent, and a three-year annualized return of 21.95 percent as of August 14, 2026.
Over the same period, the Invesco S&P 500 Momentum ETF produced five‑year and three‑year annualized total returns of approximately 21.33 percent and 38.77 percent, respectively.
This rules-based momentum index has historically participated in extended market rallies by emphasizing recent winners, often delivering higher returns than the broad S&P 500 over multi‑year bull-market periods.
This upside participation is a key reason momentum is frequently used as a tactical overlay in equity portfolios.
Tactical strategy performance in bear markets
Momentum results in down markets. Momentum strategies have not been immune to losses in bear markets, but historical data has shown they can behave differently than the broad index, sometimes reducing drawdowns or recovering more quickly.
For example, during the 2022 equity bear market, the S&P 500 Momentum Index fell −10.52 percent, compared with a larger -18.91 percent decline for the S&P 500 Total Return Index over the same full-year period (January 3, 2022 peak through December 30, 2022).
The Invesco S&P 500 Momentum ETF similarly posted a −10.46 percent total return in 2022, followed by positive returns of 17.55 percent in 2023 and strong trailing multi‑year returns since then.
While these figures reflect real‑world losses, they illustrate how a rules‑based momentum approach can sometimes mitigate drawdowns and then participate in recoveries by rotating away from the weakest stocks and toward relative winners.
Tactical strategy performance in sideways markets
Sideways, narrow range‑bound markets tend to be more challenging for momentum investing. Why is the case? The reason is that leadership changes frequently and recent winners may not stay on top long enough for the strategy to benefit.
The S&P 500 Momentum Index and SPMO have historically produced weaker relative performance in flat or choppy periods, such as 2018, when the index returned −4.52 percent and the SPMO ETF returned −0.90 percent.
The Cost of Emotional Investing
Emotional investing occurs when fear, greed, and uncertainty drive decisions instead of logic and long-term strategy.
Common examples include panic selling during market downturns, locking in losses just as recovery begins, or buying stocks at their peak, after they have already surged.
Many investors driven by fear and greed will lose. When markets are selling off, the fear of more losses causes many investors to sell after significant declines in their portfolios. This could be fine if the market continues to drop precipitously.
However, at some point, the market reaches a bottom and will recover (at least it always has). Fear still grips many investors, and they fail to allocate early enough to participate in the recovery. Many wait until long after the market is fully recovered for the greed emotion to kick in, and they allocate late.
Fear causes quite a few people to exit at the worst possible times, while greed leads them to take on excessive risk near market tops. Over time, these repeated emotional mistakes erode wealth and undermine even the best-designed long-term plans.
Investors may also second-guess their plan by jumping in and out of the market based on headlines, recommendations from family and friends, overheard conversations, or recent performance. This behavior frequently leads to buying high and selling low, which, of course, is the exact opposite of successful investing.
DALBAR’s Quantitative Analysis of Investor Behavior showed that emotionally driven decisions have caused investors to earn less than the markets they invest in over decades of data beginning in 1985. In its latest report, DALBAR found that in 2024 the average equity investor earned just about 16.5 percent, while the S&P 500 returned roughly 23.4 percent.
That’s an 6.9 percentage-point gap, attributed largely to buying high, selling low, and switching strategies at the wrong time.
In dollar terms, the divergence is more acute. An example of emotional investing is selling after a steep market decline. Suppose an investor with $100,000 in a portfolio or fund sells everything after the market drops 25 percent. His portfolio’s worth would be $75,000. To simply get back to the original $100,000, he would need a 33.3% gain on the remaining money, not 25 percent. The math does not work in his favor.
Many investors who sell in panic never achieve that recovery because they stay on the sidelines too long. This loss aversion behavior is a big destroyer of long-term wealth.
Rules-based tactical strategies can help prevent this mistake by following predefined exit and re-entry rules instead of reacting to fear and greed. They keep investors disciplined through volatility and uncertain market conditions, protecting capital when needed while staying positioned to participate in the eventual recovery.
FAQs on How Tactical Strategies Can Remove Emotion from Investing
What role does technology play in tactical investing?
Technology has become essential for removing emotion from tactical investing. In the past, asset managers made investment decisions manually, which often led to emotional biases and inconsistent execution. Today, asset managers can use portfolio management systems to automate signal generation, portfolio adjustments, and trade execution in accordance with strict, predefined rules.
These systems allow managers to apply their tactical strategies without second-guessing or emotional reactions during volatile markets.
This shift to systematic, rules-based technology has improved the ability to manage risk — something that was much harder to achieve before modern computing power and data analytics became widely available.
Are tactical strategies suitable for all portfolio sizes?
Yes, tactical strategies may work well across a wide range of portfolio sizes. Tactical approaches can be implemented using low-cost ETFs, which make frequent adjustments affordable and practical for both institutional and high-net-worth portfolios.
The rules-based nature of these strategies makes them adaptable. Because the decisions are driven by objective signals rather than individual judgment, they can be applied whether the portfolio is $500,000 or $500 million. The key is choosing the right method and making sure the strategy matches the investor’s goals and risk tolerance.
How should advisors evaluate tactical managers?
The best managers can explain how their signals are generated and what triggers changes in their investment allocations. Investors should review the performance of tactical managers in bull, bear, and sideways markets, and pay attention to how they minimize historical drawdowns, correlate to traditional benchmarks, and manage turnover.
A good tactical manager combines disciplined rules with honest communication about both strengths and limitations. And, of course, make sure the manager’s approach fits your clients’ risk tolerance, time horizon, and overall portfolio goals.
In Sum: Why Tactical Strategies Matter
Tactical investment strategies matter because they replace emotional decision-making with rules-based discipline. By following predefined signals instead of reacting to fear or greed, investors can avoid panic selling when the market misbehaves and impulsive buying at peaks.
Fear and greed are two of the biggest destroyers of long-term wealth.
A tactical approach is intended to provide downside protection during bear markets while still capturing the majority of gains during bull markets. For allocators, advisors, and investors, rules-based tactical ETF strategies may offer a practical way to maintain long-term discipline during uncertain markets, which most markets are.
For a more detailed discussion of the two tactical strategies—trend following and momentum, and why they may provide better results for investors when used together—read here. (Link will go to the next article, now in progress.)
About McElhenny Sheffield
McElhenny Sheffield believes that avoiding material losses is the foundation of successful long-term investing. Risk management and capital preservation are the firm’s top priorities.
The firm is committed to protecting investors’ financial futures through a rules-based, tested, momentum-driven, trend-following tactical ETF strategy. The strategy is positioned as a tactical satellite portfolio for advisors who need to protect their clients’ core portfolio while still seeking growth.
Clients include independent-thinking investment advisors across the U.S., large investment allocators, and high-net-worth individuals and families looking for a second opinion. McElhenny Sheffield also provides sub-advisory services for RIAs and financial advisors. The firm was founded in Dallas, TX, in 2000, and manages more than $760 million in assets as of March 31, 2026.
Disclosure
The information contained in this article has been obtained from sources believed to be reliable; however, its accuracy, completeness, and timeliness cannot be guaranteed. Any opinions or estimates reflect the author’s judgment as of the date of publication and are subject to change without notice. This material is provided for informational purposes only and should not be construed as legal, tax, or investment advice. Investors should consult their tax advisor or legal counsel for advice and information concerning their particular situation. See other important disclosures below.