The Tactical Adaptive Strategies Explained

A robust, definable and repeatable process that over time puts the balance of probabilities in our favor.

Number One

Identify Market Conditions

The Market Conditions Model measures equity and fixed income market conditions in a probabilistic way. For example, it may signal Favorable conditions if there is a high probability of a market rise with low risk. However, a signal of Favorable conditions is not a guarantee of a Bull Market nor does a signal of Hostile conditions presage, with certainty, a Bear Market. However, the three conditions, when coupled with the appropriate fund baskets, work incredibly well in lowering risk and improving returns across full market cycles

Tactical Asset Allocation Strategies Market Conditions Model

Number Two

Select Fund Basket

The Tactical Model selects a fund based on Market Condition Favorable, Balanced, or Hostile. Each fund basket consists of Exchange Traded Funds which have been carefully selected and validated for a specific market condition.

Favorable

A strongly trending market with little risk of major decline. Unexpected declines are likely to be temporary and relatively short-lived.

The fund basket emphasizes domestic and international equities supplemented with real estate, commodities and fixed income.

Balanced

Risks of market decline and opportunity for advance are roughly equal; however conditions are supportive of increased volatility and uncertainty.

The fund basket includes a mix of larger domestic and international equity funds together with a complement of high quality fixed income.

Hostile

High risk of extended market Correction (10%+) and Bear Market (20%+) declines and large equity drawdowns.

The fund basket emphasizes a broad spectrum of government fixed income together with a limited selection of large cap equity funds and commodities.

Number Three

Rank, Select, and Allocate

The Tactical Model then ranks, selects and allocates the best performing funds from the selected basket. Should there not be sufficient "best performing funds", the allocation is assigned to cash.

Rank

Four years of research and development went into Adaptive Dynamic Momentum, our ranking algorithm.

While most tactical ranking is performed using fixed length periods; Adaptive Dynamic Momentum identifies the optimum ranking criteria for each fund, each week.

The much improved trend identification results in higher returns and lower drawdowns.

Select

Fund ranking is just the beginning of the process for selecting funds for the next rebalance.

We are just as interested in how well a fund is likely to continue performing in the future as how well it has performed in the past.

Adaptive Dynamic Momentum assigns a confidence level to each fund's trend ranking. We use the combined ranking and confidence level to make the final selections.

Allocate

Once the funds eligible for the next rebalance are selected, portfolio weights are assigned to each fund.

We employ volatility weighting algorithms which allocates larger percentages to funds with low volatility and smaller percentages to funds with high volatility.

The small decrease in return is offset with a larger decrease in portfolio volatility.

It requires just a few minutes each month to rebalance the portfolio using the monthly Rebalance Notice.

STRATEGY RESULTS

TACTICAL ADAPTIVE GLOBAL

Tactical Adaptive Global, our flagship strategy, provides broad exposure to domestic and international equities, fixed income, commodities and precious metals. Tactical Adaptive Global is intended for use as the primary strategy in a tactical asset allocation portfolio. Read more about Tactical Adaptive Global in our whitepaper.

The chart shows back tested results for the Full Market Cycle beginning with the Bear Market in October 2007 and continuing through the most recent month. Dividends are included. The table, also produced by the Tactical Model, shows month by month and annual returns together with summary statistics.

Tactical Adaptive Income

There are at least two good reasons to consider a tactical fixed income strategy to supplement a broad market tactical strategy:

  • Eating distributions - some investors would prefer to withdraw distribution income for living expenses than “eat the seed corn”.
  • Tactical diversification - it is exceedingly unwise to put all your eggs in one basket, even when that basket looks far better than all the other baskets on display.

The TAAS Tactical Adaptive Income Strategy provides subscribers with a Fixed Income strategy which delivers outstanding results coupled with low drawdowns. Read more about Tactical Adaptive Income in our whitepaper.

The chart shows back tested results for the Full Market Cycle beginning with the Bear Market in October 2007 and continuing through the most recent month. Dividends are included. The table, also produced by the Tactical Model, shows month by month and annual returns together with summary statistics.

Tactical Adaptive Innovation

If you've ever been tempted to dip your investment toe into the leading edges of innovation but were put off but the high volatility; Tactical Adaptive Innovation may just fit the bill for a "big toe" portion of your portfolio. Businesses of interest include big data and analytics, nano technology, genetics, medicine and biotechnology, networks, energy and environment, robotics, 3-D printing, bioinformatics, and financial services.

Innovation will continue in virtually any economic scenario you can envision!

The TAAS Tactical Adaptive Innovation Strategy employs a small basket of innovation ETFs for exposure during Balanced and Favorable market conditions and Treasury ETFs as a safe-haven during Hostile market conditions and when innovation ETF TrendScores are insufficient to warrant an allocation. The Strategy delivers outstanding results coupled with moderate drawdowns. Read more about Tactical Adaptive Innovation in our whitepaper.

The chart shows back tested results for the Full Market Cycle beginning with the Bear Market in October 2007 and continuing through the most recent month. Dividends are included. The table, also produced by the Tactical Model, shows month by month and annual returns together with summary statistics.

What makes our strategies well worth the annual subscription price?

Low Volatility

I have tested many thousands of tactical strategies and, in every case, my first focus has been on drawdowns, then returns.

The strategies which have resulted from this discipline are strategies in which I have confidence sharing with our family and subscribers.

Market Conditions

One strategy does not fit all markets.

The integration of our Market Conditions Model, condition-specific fund baskets, and Tactical Model yields strategy combinations which are designed to navigate the full spectrum of market conditions.

Selection & Allocation

Our algorithms for selection and allocation of funds to each rebalancing are unique.

Adaptive Dynamic Momentum, which increases the accuracy and timeliness of trend identification, is coupled with confidence based selection algorithms and volatility weighting.

This combination provides the unique building blocks for the TAAS Tactical Adaptive Global, Tactical Adaptive Income, and Tactical Adaptive Innovation Strategies which lowers your risk and improves your returns well beyond the capabilities of traditional Asset Allocation methods.

The TAAS Strategies employ a robust, definable and repeatable process that over time puts the balance of probabilities in our favor.

A Caveat

A 35+ year secular bull market in both equities and bonds began in 1982. The last cyclical bull market in equities (and to a lesser extent, bonds) began 10 years ago. Returns during these periods have been historically exceptional. Market returns for the next 10 years are highly unlikely to approach those of the past 10. In fact, there is at least some evidence that market returns have a high probability of being significantly lower and that bonds and equities (which have risen together) may actually begin working at cross purposes.

Investors should not use the statistics shown for our strategies to establish expectations of specific levels of returns or drawdowns. Investors should, however, appreciate that we believe the principles which underlie the Tactical Adaptive Global, Tactical Adaptive Income, and Tactical Adaptive Innovation Strategies are enduring enough to significantly outperform the market in the future, both in lowering risk and in improving returns.

Ready to get started?

I will be rolling out upgrades to the Tactical Model and Adaptive Strategies beginning with the November 29 rebalance for the month of December. In each case, the focus has been on improving control over the upper bounds of portfolio volatility, improving the consistency of annual returns, and on reducing fund turnover.

In order to provide the fullest possible disclosure, the Chart and Table displays on the website will include tables for both the original (labeled “Repl Dec 2019)” and upgraded Strategy beginning with the next update in early December.

The primary benefit of minor changes to Adaptive Global is reduction in both Standard Deviation of Monthly Returns and the Ulcer Index:.

  • Fund basket and condition eligibility: no change was made to fund baskets or condition eligibility
  • Fund selection: no change to fund selection method (Adaptive Dynamic Momentum)
  • Weighting of selected funds: Volatility Weighting was replaced with Limited Portfolio Volatility Weighting which is employed to cap the expected total portfolio volatility when high volatility funds (especially equities and commodities) are used. This slightly reduces both risk and return.
  • Position Optimization: Upgraded which slightly improves holding periods and performance.
  • Full cycle: CAGR decreased slightly from 14.9% to 14.5%;  Max Monthly Drawdown declined from 8.7% to 7.9%; and the Up/Down Ratio decreased fractionally from 226.4% to 226.1%. The Ulcer Index declined from 3.7% to 3.6% and Standard Deviation of Monthly Returns declined from 9.5% to 9.1% reflecting improved consistency of returns.

A Caveat

A 35+ year secular bull market in both equities and bonds began in 1982. The last cyclical bull market in equities (and to a lesser extent, bonds) began 10 years ago. Returns during these periods have been historically exceptional. Market returns for the next 10 years are highly unlikely to approach those of the past 10. In fact, there is at least some evidence that market returns have a high probability of being significantly lower and that bonds and equities (which have risen together) may actually begin working at cross purposes.

Investors should not use the statistics shown for our strategies to establish expectations of specific levels of returns or drawdowns. Investors should, however, appreciate that we believe the principles which underlie the Tactical Adaptive Global, Tactical Adaptive Income, and Tactical Adaptive Innovation Strategies are enduring enough to significantly outperform the market in the future, both in lowering risk and in improving returns.

I will be rolling out upgrades to the Tactical Model and Adaptive Strategies beginning with the November 29 rebalance for the month of December. In each case, the focus has been on improving control over the upper bounds of portfolio volatility, improving the consistency of annual returns, and on reducing fund turnover.

In order to provide the fullest possible disclosure, the Chart and Table displays on the website will include tables for both the original (labeled “Repl Dec 2019)” and upgraded Strategy beginning with the next update in early December.

The primary benefit of changes to Adaptive Income is a broadening of the fund basket and reduction in both Standard Deviation of Monthly Returns and the Ulcer Index:

  • Fund basket and condition eligibility: the number of fixed income ETFs was increased from 5 to 6 to broaden the basket to include an investment grade ETF.
  • Fund selection: no change to fund selection method (Adaptive Dynamic Momentum)
  • Weighting of selected funds: Adaptive Income used a single selection with a 100% weighting to the best performing fund. Limited Portfolio Volatility Weighting is now employed to cap the expected total portfolio volatility when higher volatility funds (especially high yield) are used. This forces the allocation across a second, lower volatility fund when the cap is exceeded.
  • Position Optimization: Upgraded which slightly improves holding periods and performance.
  • Full Cycle: CAGR increased slightly from 10.5% to 10.9%; Max Monthly Drawdown increased from 2.9% to 3.8% however Max Daily Drawdown remains unchanged at 7.1%; and the Up/Down Ratio rose from 503.0% to 555.7% (a huge jump in efficiency). The Ulcer Index declined from 1.3% to 1.2% and Standard Deviation of Monthly Returns declined from 5.5% to 5.0%.
  • Note: the increase in Max Monthly Drawdown is directly attributable to the addition of the investment grade ETF. Because the Max Monthly Drawdown remains exceptionally low, this appears to be a reasonable trade-off given the size of other improvements.

A Caveat

A 35+ year secular bull market in both equities and bonds began in 1982. The last cyclical bull market in equities (and to a lesser extent, bonds) began 10 years ago. Returns during these periods have been historically exceptional. Market returns for the next 10 years are highly unlikely to approach those of the past 10. In fact, there is at least some evidence that market returns have a high probability of being significantly lower and that bonds and equities (which have risen together) may actually begin working at cross purposes.

Investors should not use the statistics shown for our strategies to establish expectations of specific levels of returns or drawdowns. Investors should, however, appreciate that we believe the principles which underlie the Tactical Adaptive Global, Tactical Adaptive Income, and Tactical Adaptive Innovation Strategies are enduring enough to significantly outperform the market in the future, both in lowering risk and in improving returns.

I will be rolling out upgrades to the Tactical Model and Adaptive Strategies beginning with the November 29 rebalance for the month of December. In each case, the focus has been on improving control over the upper bounds of portfolio volatility, improving the consistency of annual returns, and on reducing fund turnover.

In order to provide the fullest possible disclosure, the Chart and Table displays on the website will include tables for both the original (labeled “Repl Dec 2019)” and upgraded Strategy beginning with the next update in early December.

This upgrade to Adaptive Innovation improves performance while significantly reducing volatility.

  • Fund basket and condition eligibility: The existing long duration Treasury ETF was added to the eligible funds for Balanced conditions. This allows strongly performing Treasuries to complete effectively with the Innovation equities for selection. A short duration Treasury ETF was added to provide a higher yielding alternative to cash.
  • Fund selection: no change to fund selection method (Adaptive Dynamic Momentum)
  • Weighting of selected funds: Volatility Weighting was replaced with Limited Portfolio Volatility Weighting which is employed to cap the expected total portfolio volatility when the higher volatility Innovation funds are used. While Adaptive Innovation typically employs 2 fund selections, this can force the allocation to a third fund when the volatility of the primary fund(s) exceeds the cap.
  • Position Optimization: Upgraded which made no change in holding periods and performance.
  • Partial cycle: CAGR increased slightly from 25.5% to 27.6%,  Max Monthly Drawdown and Maximum Daily Drawdown remained unchanged at 12.2% and 19.2% respectively; and the Up/Down Ratio increased from 277.3% to 329.8% (another big increase in efficiency). The Ulcer Index declined from 5.7% to 5.1% and Standard Deviation of Monthly Returns declined from 15.6% to 14.8%.

A Caveat

A 35+ year secular bull market in both equities and bonds began in 1982. The last cyclical bull market in equities (and to a lesser extent, bonds) began 10 years ago. Returns during these periods have been historically exceptional. Market returns for the next 10 years are highly unlikely to approach those of the past 10. In fact, there is at least some evidence that market returns have a high probability of being significantly lower and that bonds and equities (which have risen together) may actually begin working at cross purposes.

Investors should not use the statistics shown for our strategies to establish expectations of specific levels of returns or drawdowns. Investors should, however, appreciate that we believe the principles which underlie the Tactical Adaptive Global, Tactical Adaptive Income, and Tactical Adaptive Innovation Strategies are enduring enough to significantly outperform the market in the future, both in lowering risk and in improving returns.