Note: one of my posts from last year, When Models Fail, was chosen for Faber’s Best Investment Writing Volume 3. Check it out if you get a chance.
Time to take a quick look back at 2019 YTD performance. In this post I present a quick overview of 1H 2019 Tactical Asset Allocation performance and make some brief observations. Let’s dive right in.
The table below shows all of the TAA portfolios tracked by Allocate Smartly with some additions from me. Portfolios are sorted by 1H 2019 performance. I added my Economic Pulse TAA portfolios and a more global buy and hold benchmark for TAA portfolios that I like to use, the GAA (Global Asset Allocation) portfolio. Benchmark buy and hold portfolios are highlighted in green, other buy and hold portfolios are highlighted in light blue, the Economic Pulse portfolios are in yellow. Also check out AllocateSmartly’s June 2019 TAA performance review here. The table also contains longer term (20 years) performance statistics. I also created a Google sheet with links to the portfolios so that you can use to do your own analysis if you like.
As you can see from the table only one TAA portfolio, Growth Trend Timing, outperformed the US centric 60/40 portfolio in the 1H of 2019. And that’s because it came into 2019 holding SPY (its only investable risk asset) and never made a change. Also, only 5 TAA portfolios outperformed the more global GAA benchmark. In general all the buy and hold portfolios tracked, except one, were in the Top 10 in terms of 1H 2019 performance. This pain of periodic underperformance is part and parcel of being a TAA investor or of investing in any strategy that is not the benchmark. Even a buy and hold investor underperforming the benchmark by 5%, like the Permanent Portfolio investor this year, would be experiencing the same thing. If you want an in depth dive into the periodic pain of being a TAA investor see this awesome post from Alpha Architect. I’ll be diving into some of the details of their post in a follow-on piece.
The main reason for TAA underperformance so far this year is whipsaws. TAA portfolios took a while to go back to risk-on at the beginning of the year, only to be whipsawed back to risk-off, and now back to risk-on again. The right side of the chart below shows this in more detail.
However, overtime, if you stick with these TAA approaches the odds are that you will come out far ahead of buy and hold. Compare the 2019 YTD performance figures with the annual return figures for the last 20 years. Compare them across buy and hold and TAA strategies. Do the same with the drawdown figures. That is why you invest in TAA – higher risk-adjusted returns over the long haul. In the short term, it often sucks and creates a lot of doubt. That’s just part of the process and a big part of what creates the outperformance over the longer term.
That’s about it for today. There’s still 6 months to go in 2019 so we’ll see where TAA ends up with respect to buy and hold for the year. Happy Fourth of July!