TAAStrategies: The All Weather Strategies

(Updated 07/01/22)

There has been no shortage of talking heads ranging from FOMC members to economists to market timers; each expounding upon their views of the future. Inflation will be up. Inflation will be down. Recession ahead. No recession. Yields are going much higher. Yields are about to turn lower. Equities still in a bull market. Equities headed for a major bear market.

How to deal with all of this? Should we simply retreat into cash? Let’s see if we can find some answers in the 22+ years of history we have available for two of our TAAStrategies: the multi-sector Tactical Adaptive Global Strategy and the fixed income Tactical Adaptive Income Strategy.

Tactical Asset Allocation

First, a quick explanation of Tactical Asset Allocation (TAA).

Tactical Asset Allocation is an active management strategy that dynamically adjusts a portfolio’s asset allocation to current market conditions with the objectives of minimizing the potential for large losses and maximizing opportunities to improve returns. Tactical Asset Allocation employs a mechanical approach to selection of funds within a basket of low cost index funds. (More here in our whitepaper.)

Building The Table

I broke the 22 years of history into buckets for inflation, recessions, major changes in 10 year Treasury yields, and bull and bear markets. In each case, I started with the cycle closest to January 2000 and I further segregated each bucket according to direction by color coding each entry with light green for rising and light red for falling.

We end up with a useful cross section of conditions for comparison to the S&P 500, Adaptive Global, Vanguard Total Bond Fund, and Adaptive Income.:

  • Inflation: 3 rising and 2 falling
  • GDP: 3 growth cycles and 3 recessions
  • 10 year Treasury Yield: 4 with rising yields and 4 with falling
  • Bull and Bear markets: 3 bull markets and 4 bear markets

Results

Both Adaptive Global and Adaptive Income have provided consistently positive returns and surprisingly low drawdowns across all eight economic conditions during the 22+ years.

The table provides 26 results across 8 different economic conditions.

  • Of the 26 results, the S&P 500 showed negative CAGRs for 9 and Vanguard Total Bond for 6 while Adaptive Global had 1 and Adaptive Income had 2.
  • Even bigger differences show up in Maximum Drawdowns where the S&P 500 shows 20 results greater than 10%, 8 results of 20%+, and 6 of 30%+ compared to 5 results greater than 10% for Vanguard Total Bond, and 0 results greater than 10% for Adaptive Global and Adaptive Income.
  • Looking at the largest drawdowns, the S&P 500 declined 50.8%, Vanguard Total Bond declined 12.7%, Adaptive Global declined 7.7% and Adaptive Income declined 3.9%.

Opportunity For Investors

Investors wishing to view month by month performance of the strategies will find detailed tables below.

The Adaptive Global and Adaptive Income strategies stand out for their ability to significantly lower risk and improve returns.They do so using a mechanical process where the effort is limited to portfolio rebalancing once a month. Investors seeking opportunities to better navigate uncertain future conditions would do well to consider these strategies. New subscriptions include a two month money back guarantee.

The TAAStrategies website includes numerous whitepapers and strategy details.

The TAAStrategies, A Short History describes the construction and evolution of the TAAStrategies.

Thank you for reading!

Earl Adamy

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Exceptional results are due entirely to the complementary strengths of our Market Conditions Model and our Tactical Model.

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Compares performance of the Tactical Adaptive Strategies to the S&P 500 and Vanguard Balanced Index Fund

Supporting tables for Tactical Adaptive Global. S&P 500 (SPY) and Vanguard Balanced Index Fund (VBINX) can be found below

Our results tables are constructed for three full market cycles beginning in January 2000.

The Adaptive Global table shows backtested results through July 2018 followed by actual results. More information is available in the blog article: The TAAStrategies, A Short History.

The most recent market cycle covers January 2020 to date.

The second market cycle covers October 2007 through December 2019. The Adaptive Global and Adaptive Income strategies were developed using the first 10+- years of data from this cycle while the final years are actual.

The third market cycle covers January 2000 through September 2007. This market cycle was used to provide out of sample validation of strategy results from the second market cycle. The fact that the return and risk metrics for the third cycle are statistically comparable to those for the second cycle validates the process.

The fund baskets for our tactical strategies are constructed from indexed Exchange Traded Funds (ETFs) with just two exceptions, an Open End Fund and a Closed End Fund, both with long history. A number of the ETFs we use were not created until 2007+. In each case, we infill using predecessor Open End Funds (OEFs) for which the indexing and/or subclass is substantially similar to the ETF.

We have been asked if it is possible to extend backtests to the 1970’s. While a few publishers attempt this; we believe it is not possible to produce credible results for all but the most basic TAA strategies due to the lack of funds with substantially similar indexing and/or classification. Doing so would force me to stretch the term "substantial" far beyond my comfort level.

A blank month indicates that the strategy was in cash.

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.

Benchmark S&P 500 (SPY)

Benchmark Vanguard Balanced Index Fund (VBINX)

Compares performance of the Tactical Adaptive Strategies to the S&P 500 and Vanguard Balanced Index Fund

Supporting tables for Tactical Adaptive Income, S&P 500 (SPY) and Vanguard Balanced Index Fund (VBINX) can be found below

Our results tables are constructed for three full market cycles beginning in January 2000.

The Adaptive Income table shows backtested results through June 2019 followed by actual results. More information is available in the blog article: The TAAStrategies, A Short History.

The most recent market cycle covers January 2020 to date.

The second market cycle covers October 2007 through December 2019. The Adaptive Global and Adaptive Income strategies were developed using the first 10+- years of data from this cycle while the final years are actual.

The third market cycle covers January 2000 through September 2007. This market cycle was used to provide out of sample validation of strategy results from the second market cycle. The fact that the return and risk metrics for the third cycle are statistically comparable to those for the second cycle validates the process.

The fund baskets for our tactical strategies are constructed from indexed Exchange Traded Funds (ETFs) with just two exceptions, an Open End Fund and a Closed End Fund, both with long history. A number of the ETFs we use were not created until 2007+. In each case, we infill using predecessor Open End Funds (OEFs) for which the indexing and/or subclass is substantially similar to the ETF.

We have been asked if it is possible to extend backtests to the 1970’s. While a few publishers attempt this; we believe it is not possible to produce credible results for all but the most basic TAA strategies due to the lack of funds with substantially similar indexing and/or classification. Doing so would force me to stretch the term "substantial" far beyond my comfort level.

A blank month indicates that the strategy was in cash.

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.

Benchmark S&P 500 (SPY)

Benchmark Vanguard Balanced Index Fund (VBINX)

Compares performance of the Tactical Adaptive Strategies to the S&P 500 and Vanguard Balanced Index Fund

Supporting tables for Tactical Adaptive Innovation, S&P 500 (SPY) and Vanguard Balanced Index Fund (VBINX) can be found below

The Innovation ETFs used in the Innovation Strategy were not established until 2014-2015 so our history is limited.

There are no predecessor funds which are similar enough to use for infill.

The Adaptive Innovation table shows backtested results through June 2019 followed by actual results. More information is available in the blog article: The TAAStrategies, A Short History.

A blank month indicates that the strategy was in cash.

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.

Benchmark S&P 500 (SPY)

Benchmark Vanguard Balanced Index Fund (VBINX)