Strategy vs. tactics.

IT was no easy year for playing the money-management game known as tactical asset allocation.

The various classes of investments--stocks, bonds and so forth--kept zigging when they were supposed to zag. People who aren't careful jumping around among them could hurt themselves.

Look how many investors shunned bonds and bond mutual funds heading into 2004, certain that a rise in interest rates was going to drive bond prices lower. But the yield on 10-year Treasury notes stands pretty much where it was 12 months ago.

If I opted instead for the purported safety of money-market funds over those 12 months, I got a return of about 1 percent for my trouble, or less than one-fourth of the coupon interest I would have received from the 10-year Treasury.

Looking ahead to 2005, the smart money again says bond-market rates are bound to rise, this time for sure. Their arguments are as compelling as ever, and on this go-round they may actually prove right, Still, if they could be so wrong in 2004, what makes us think the same forecast is any more reliable now?

The tactical-asset call I couldn't resist falling for in 2004 concerned big stocks and little stocks. Small-caps, as they are known in the business, came into the year looking fat and sassy. The small-stock Russell 2000 Index had beaten the big-stock Russell 1000 for five straight years, including a 45.4 percent to 27.5 percent shellacking in 2003.

Any crafty contrarian could see big stocks were overdue for a rally. The savvy move was to switch some money from a small-stock fund to one favoring the big blue chips.

How inconvenient, as events unfolded, to see the small-stock index prevailing again in '04, this time by a resounding 2-1 ratio through the first 11 months of the year.

Sooner or later, big stocks must get noticed again. And you or I aren't the only ones who think sg. Consider this comment from the Web site of money-management kingpin Fidelity Investments: "With small-cap stocks enjoying a five-year run of strong performance, large-caps may be poised to take the lead."

All investors must choose how to deploy their money among the various classes, and the way in which they pursue this risk-reward balancing exercise plays a big part in determining the success of their money-management plans.

The key is to distinguish between tactical and strategic asset allocation. The strategic kind can be based, as it ought to be, mostly on an investor's own circumstances. Another good thing about strategy, as opposed to tactics, is that it focuses on "an intended objective," in the words of the American Heritage Dictionary, while tactics are concerned with "operations that are smaller, closer to base and of less long-term significance."

In other words, too much tactics and not enough strategy can put me at risk of forgetting what I'm fighting this whole battle for.