Actual Performance Tracks The Model

I have been using the TAAS Strategies to manage a major portion of my family's investments since December 2014. Monthly results have tracked within 0.01%-0.02% of the TAAS Strategy model.

The tight tracking between model and actual cash results is by design. There are three reasons why the tracking is so tight:

Avoid Slippage

The TAAS Strategies stick to large, established Exchange Traded Funds and we use Market On Close orders to insure that buy and sell orders are executed at the same closing prices used in the Model.

Market On Close (order type MOC) can be entered hours or even days in advance of the close for execution during the closing process at each exchange.

Distribution Database

I maintain our own dividend database to insure that our performance reflects the dividend and gains distributions received in subscriber accounts.

All historical quote providers get closing prices right; however the accuracy of distribution data varies widely. We collect distribution data directly from ETF providers with all decimal places intact.

Ultra-low Trading Costs

The Strategies often hold positions for months or even years (with minor size adjustments) which keeps trading costs down.

My actual commission costs at Interactive Brokers average .03% of account size per year. Folio Investing offers an Unlimited Plan at $290 annually - one fee covers all accounts held by a single owner even where types are mixed: taxable, retirement, trust, custody.

Variations, when they occur, are most often due to:

  1. timing of dividend payments which the model accounts as earned on ex date while cash accounting records when paid
  2. decision to skip a rebalance because the change in allocation is too small to justify a trade
  3. changes in price between the placement of orders and the close can minimally affect the share counts required to meet the allocation percentages

When the last trading day of the month falls on the last trading day of the week, we calculate rebalance allocations at mid-day and send out the Final Rebalance Notice. Although it has yet to happen, there is the potential for allocations to shift between the time of calculation and the close.

TAX EFFICIENCY

Buy and Hold is extremely tax efficient; however it can produce very large drawdowns. Tactical Asset Allocation mitigates risk and reduces losses by adjusting the portfolio to market conditions and thereby loses some tax efficiency. However paying modestly higher taxes on gains is a far better alternative to using large losses to offset gains.

Non-taxable accounts

Tactical Asset Allocation mitigates risk and reduces losses by adjusting the portfolio to market conditions with no loss of tax efficiency in non-taxable accounts.

Taxable accounts

Investors who prioritize tax strategies over sound investment strategies often learn to their regret that it would have been more prudent to pay the taxes and avoid the capital losses. The rationale is quite simple ... the preservation of gains and protection of investment capital bring far more benefit to long term investment results than the avoidance of taxes.

I prioritize capital protection and adaptation to market conditions ahead of minimizing taxes. While all of our strategies have turnover that can lead to short-term capital gains tax for taxable accounts, I am confident that the Strategies will produce returns that overcome the tax drag across a full market cycle. I believe strongly that providing a stable investment environment that avoids large losses enhances investor staying power and thus long term investment results.

The Global Core basket, which can hold core positions for periods as long as 2-3 years, tends to be relatively tax efficient while the Global Satellite basket tends to generate a higher level of opportunistic short term gains.

While the TAAS Strategies are rebalanced monthly, they have, to the degree possible, been designed to optimize tax efficiency. Portfolio turnover rates are higher than "buy and hold" strategies but significantly lower than many "actively managed" portfolios.

The TAAS Core Strategy is designed to maintain a core fund position for long periods of time; however the share count may be adjusted dynamically up and down during the holding period. Using "Last In, First Out" provides the best opportunity for the longest held shares to qualify for Long Term tax treatment. For example:

Month 1: Open fund position with 1000 shares
Month 2: add 50 shares
Month 3: sell 25 shares
Month 4: add 50 shares
Month 5: sell 75 shares
Month 6: sell 25 shares
Month 7: sell 50 shares
Month 8: buy 25 shares
Month 9: buy 50 shares
Month 10: sell 50 shares
Month 11: sell 50 shares
Month 12: buy 100 shares

at this point, 925 original shares remain eligible for Long Term tax treatment on a Last In First Out basis.

The TAAS Satellite Strategies are more likely to qualify for for Short Term tax treatment.