What trade-off is associated with tactical asset allocation?

Tactical asset allocation involves actively adjusting the percentage of different asset classes in a portfolio to capitalize on market conditions and trends. This strategy enables investors to seek potentially higher returns by taking advantage of short-term market opportunities. However, this approach also requires accurate predictions about market movements, indicating the inherent trade-off involved.

The necessity for precise market timing and forecasting introduces a higher degree of risk and complexity for the investor. Successful tactical asset allocation relies on the ability to predict which asset classes will outperform and when to adjust the allocations accordingly. Consequently, while it opens the door to potentially increased returns, it demands a nuanced understanding of market dynamics and carries the risk that predictions may be inaccurate, leading to suboptimal investment outcomes.

Other options don't encapsulate the true nature of tactical asset allocation effectively. For example, there are no guarantees of high returns, as markets can be unpredictable. Additionally, it does not simplify asset management, nor does it commit the investor to a single asset class, as tactical strategies are inherently dynamic.