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.

Full Disclaimer - Nothing on this site should ever be considered advice, research or the invitation to buy or sell securities. These are my personal opinions only.

13 thoughts on “TAA: choosing your first strategy

  1. I started researching Tactical Asset Allocation strategies in late 2011 because I did not want to have to repeat the process of hedging my investment portfolio with short SPX futures. While very successful, that was a time-consuming and stressful process.

    So my starting point with TAA was to avoid large portfolio drawdowns with a secondary objective of achieving good returns. I did not care so much about beating the market as now allowing the market to beat me. My objective for TAA across a full Bull/Bear market cycle has long been a maximum of 10% Bear Market Drawdown and a minimum of 10% Compound Annual Growth Rate.

    While it is possible to boost TAA returns during Bull Markets using a process of strategy shifting based on market conditions, it is a fact that most TAA strategies will lag annual returns from buy and hold (aka Strategic Asset Allocation) for 30%-50% of a Bull Market. It is that issue which brings out a “recency bias” which leads investors to forget about painful drawdowns in favor of choosing higher returns. Unfortunately for many investors, that bias becomes most acute in late stage Bull markets.

  2. Thank you for your great posts. I still haven’t implemented all the help you gave me in January. Believe it or not that night I ended up in the hospital with internal bleeding and took it easy most of this year. It looks like your newsletter would be a good investment.

    Why did you cross out Faber’s name and not compare the Agg 3? Sorted by return it is #3 in my account.

    1. Sorry to hear Andrew. Hope you are all well now. I crossed out Faber’s GTAA5 because it doesn’t beat buy and hold. And I didn’t include AGG3, which is a strategy I use, because the number of trades is over the threshold of 12 that I set for this.


  3. Paul,
    I subscribed to Allocate Smartly after reading about it on your blog. It is uncanny how you culled the list down to the same methods I chose to beat the market with minimum number of trades and minimum drawdown.

    The portfolio I chose is 40% Vigilant Asset Allocation, 35% Stoken Monthly, and 25% Antonacci GEM. I chose day 6 as the trading day each month based on a past study that showed the markets rise the last 2 and first 5 days of the month disproportionately to the other periods of the month due to new money entering from 401k/pensions, so I wanted to capture those gains in the momentum methods before a signal is determined to help insure I am staying on “the fastest horse”. If you run this portfolio you will see NO NEGATIVE YEARS years from the data which starts in 1990, a 6.7% max drawdown, 13.2 % CAGR, 1.35 Sharpe, and 2.55 Sortino.
    I love having a mechanical method with a very smooth ride (based on past results). Thank you for expanding my knowledge of what is possible with TAA.


  4. Paul,
    Since I am concerned that long term bonds will face a headwind of rising rates, and the GEM, Vigilant, and Stoken methods deploy bonds as stock alternative, when they switch to bonds I invest those funds in your “Novell’s Tactical Bond Strategy” which is published with AllocateSmartly. I like that your bond method provides a cash option if bonds are performing poorly. It would probably be complicated to program, but it would be nice if they could backtest your bond method as the bond portion of the methods listed on AllocateSmartly vs the bonds spelled out in their methods.

  5. Hi Paul

    I note that you said you were eliminating strategies without global equity exposure, but as far as I can see from the allocate smartly blog post on Stoken’s ACA, the only equity assets are US ones. Do you use a different, global version of this strategy?



    1. Mike, thanks for that. I screwed the pooch on that one. You are right, Stoken is US only. I’ll fix the post.
      That narrow’s the global low number of trades list down to 3.


  6. Hi Paul,
    Adaptive asset allocation ranks very highly on their list with an especially low drawdown Any thoughts on this?
    Thanks, Simon

    1. I think it is a great strategy, especially for a non-taxable account, but not for the beginner or a first TAA portfolio. It trades on average 50 times a year and has a portfolio turnover of over 500%.


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