TAA: choosing your first strategy

Tactical Asset Allocation (TAA) strategies have come a long way in the last few years. From a small corner of the financial blogosphere to basking in broad daylight. I’d like to think I had a small role to play in that but really it’s the result of the amazing work done by the likes of Meb Faber, Gary Antonacci, the Alpha Architect team, the folks at Resolve, Scott’s Investments, CXO Advisory, and in the last year or so the great central TAA resource that is Allocate Smartly. Now one of the big challenges for those new to the TAA landscape is where to start. That’s what I want to talk about today – how to choose your first TAA strategy.

There are many ways to get started with TAA but I want to present a few real simple criteria that someone getting started should consider. Looking though the Allocate Smartly list of TAA strategies there are about 35 to choose from. They all do a good job of increasing risk adjusted returns over buy and hold. From the mistakes I’ve seen investors make with these strategies I think two of the basic criteria should be effectiveness and simplicity. Let’s filter the TAA strategies by requiring that they beat buy and hold returns (effectiveness) and keep the number of trades per year low (simplicity), at the most one trade per month (or 12 per year). Below is the result of that filter. I use data for the last 20 years since most of the strategies were not implementable before then and I think it better represents real world results.

Those simple requirements of beating buy and hold and low number of trades eliminate most of the TAA strategies. There are 8 strategies that meet that test. I eliminated one more, the Stoken ACA daily strategy, because the results are basically the same as the simpler monthly version of the strategy. That leaves is with seven strategies or about 20% of the available strategies. This is definitely a good starting point. But I think there is one more very important criteria. I think for a TAA strategy to make up an important part of any portfolio it needs to be global in nature, at least as it concerns equities. This is simply for diversification and opportunity. Over the last 20 years US stocks have outperformed non-US stocks by a wide margin, approximately 7.5% per year vs 4.7% per year respectively. That is unlikely to continue over the next 20 years so I think having a TAA strategy that can invest in global equities is important. If we further filter the TAA list by that criteria we get the following list.

Now we’re down to four strategies: Vigilant Asset Allocation, Stoken’s ACA monthly, Antonacci’s GEM, and Antonacci’s Composite Dual Momentum.

P.S. Nov 7th edit. Stoken’s ACA is a US only strategy as well. Thanks to blog reader Mike for catching my big mistake. The list of global buy and hold beating low number of trades strategies is only 3.

I think that is a great list to choose from for a core strategy. Even within this list an investor needs to consider the differences between the real low number of trades with GEM and ACA (about 3 per year) vs the low but still much higher number of trades with Vigilant Asset Allocation and Composite Dual Momentum (about 10 per year). Once an investor has a core TAA strategy to get started then they can weigh other potentially higher return, yet more complicated TAA strategies.

That’s about it. You can make the selection criteria way more complicated but I think to get started with TAA effectiveness and simplicity are two most important. You’ll get good returns vs buy and hold, lower drawdowns, and a higher chance of sticking with the strategies when times get stressful.

P.S. Two of the strategies I implement in my Economic Pulse Newsletter meet both the criteria and effectiveness criteria rather well. They both meet the criteria and perform just as well as the top ranked strategies. They would rank #1 and #2 on the above list. To find out more see the Economic Pulse Newsletter about page.