Tactical Asset Allocation TAA
TAA – Maximize returns.
Minimize drawdowns.
In 5 minutes you will learn:TAA – What is Tactical Asset Allocation an what is it good for?
- TAA strategies invest in mostly broadly diversified investment portfolios according to technical criteria with various assets such as stocks, gold, bonds, commodities or real estate. As in Step 2, ETFs are often used for this.
- As a rule, the strategies take into account predefined factors such as trend or momentum when selecting assets. Investments are only made in assets that are in an upward trend or that have strong momentum or relative strength compared to alternatives.
- Buy and sell signals are usually generated once a month, at most.
- In this way, short-term market fluctuations and time-consuming monitoring are ignored, and cost-intensive, frequent reallocations are avoided.
- By regular “rebalancing”, the portfolio is shifted completely mechanically at defined times and according to specified criteria. This eliminates human emotions and follows a “tactical” system over the long term in investment.
Maximizing returns and reducing drawdowns are top priorities of TAA strategies.
Tactical Asset Allocation
Buy & Hold-like returns with lower volatility? – Optimize your portfolio and use TAA. An investment strategy for active investors.
Your investment strategy for wealth preservation or a time horizon of less than 10 years.
With TAA, the asset that delivers the best return prospects for the following month according to the previously defined investment strategy criteria (e.g., upward trend must be present, relative strength to other asset classes) is purchased monthly. In this way, “weaker” assets in the portfolio are reduced.
TAA typically combines various forms of trend and momentum strategies. Compared to other trading approaches, the robustness of the trend and momentum factors has been scientifically proven.
Below are some examples of such TAA strategies published by AllocateSmartly – one of the leading providers for TAA monitoring over the last decades:
Various TAA strategies (orange) in long-term comparison to the classic 60/40 portfolio (60% equities / 40% bonds – in gray).
AA portfolios are particularly interesting for long-term investors who do not want to be passively exposed to the market. To achieve this, portfolio adjustments are made at regular intervals (often monthly) based on tested, systematic rules.
Depending on the selected strategy, the return that can be achieved is usually somewhat higher than the standard buy-hold portfolio of 60% equities and 40% bonds. In addition, TAA portfolios typically suffer lower drawdowns in crisis phases because the portfolio is restructured according to trend and momentum factors so that it reacts actively, but systematically, to market events.
The best TAA strategy for your portfolio.
Keller and Keuning’s Vigilant Asset Allocation – Aggressive has achieved an average return of 17.7% per year since 1970 with a max drawdown of -16.1%. The Accelerating Dual Momentum TAA strategy is the best-performing strategy on the AllocateSmartly TAA platform over the past 20 years, with an annual return of 16.4%. The maximum drawdown, however, was also -15.3%. Other strategies yield slightly less returns, but also experience lower drawdowns and fluctuations in value.
Especially with larger investment portfolios, it can be interesting to look at the return achieved by a TAA strategy from the perspective of accepted volatility. There are two key metrics for this:
- the Sharpe-Ratio
- the Sortino-Ratio
The following applies to both key indicators – the higher, the better. Better because the return was achieved with less risk due to volatility, i.e., fluctuations in the value of the portfolio. When volatility is lower, drawdowns are also lower and it is easier for investors to execute the strategy during periods of crisis, which is necessary for generating long-term, average to above-average returns.
TAA portfolios have performed very well in the past – what does the future hold?
Unfortunately, no one can predict which TAA strategy will generate the highest returns in the future. Nonetheless, historical data tells us that virtually all scientifically proven TAA strategies produce significantly positive returns over periods of a few years, often outperforming the market. However, we do not know exactly what the economic environment will be like in the future. It is therefore not possible to predict whether, for example, a more defensive strategy with a higher proportion of bonds and cash in the portfolio will perform better than a more offensive strategy with a high proportion of equities and commodities.
The future is uncertain – is a combination of different TAA strategies the solution?
If we combine different TAA strategies that are as unrelated as possible, we can design a highly stable investment portfolio. A portfolio which, compared to buy&hold investments in the global economy, is also suitable for a short-term investment horizon of less than 10 years.
The Howyouinvest TAA Portfolio
Die Howyouinvest-TAA-strategy combines 3 different TAA-strategies on the AllocateSmartly platform with the following weightings:
- Generalized Protective Momentum 41%
- Risk Premium Value – Best Value 21%
- Vigilant Asset Allocation – Agressive 38%
On average, the strategy is invested in five out of nine assets:
- SPY – S&P 500 ETF – US-Equities
- EWJ – Japanese Equities ETF
- EFA – Europe, Australasia, Far-East Equities ETF – International Equities ex USA
- EEM – Emerging Markets Equities ETF
- IEF – US sovereign bonds 7-10 years remaining maturity
- TLT – US sovereign bonds 20 years+ remaining maturity
- LQD – US corporate bonds (investment-Grade)
- DBC – Commodities ETF
- Cash – cash at hand
The strategy has achived an average return of 14,8% per year since 1980 with a maximum drawdown of only 6,9%!
Depending on the current market trends, a portfolio rebalance takes place on the last day of each month. For example, assets with negative momentum are sold to increase cash holdings. In this way, crises such as the 2020 Corona Pandemic are skillfully avoided and used to your advantage (see chart drawdown curve – the portfolio in Backtest compared to the 60/40 portfolio).
There is no guarantee that this portfolio will continue to perform so strongly in the future, but it can be assumed that above-average returns will continue, with moderate setbacks. This strategy is therefore interesting for investors who do not want to invest their capital for a minimum of 10 years or who cannot or do not want to accept the high volatility of the stock market in the long term.
Our Email-Service will inform you monthly and timely, which assets the howyouinvest-TAA-strategy is investing in – for free!
