Since the great recession, government driven monetary policies have consistently propped up risk assets such as stocks to elevated levels. This helps strategic asset allocation (buy and hold and re-balance) portfolios outperform tactical allocation (dynamically adjusting risk asset exposure) portfolios. This is illustrated by the following performance comparison:
| Portfolio/Fund Name | 1 Week Return* | YTD Return** | 1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe | 10Yr AR | 10Yr Sharpe |
|---|---|---|---|---|---|---|---|---|---|---|
| MyPlanIQ Diversified Core Allocation ETF Plan Strategic Asset Allocation - Equal Weight Moderate | 0.0% | 7.7% | 13.8% | 118.7% | 8.9% | 76.2% | 2.6% | 14.9% | 8.1% | 57.5% |
| MyPlanIQ Diversified Core Allocation ETF Plan Strategic Asset Allocation - Optimal Moderate | 0.3% | 9.5% | 17.3% | 140.4% | 10.2% | 84.6% | 5.0% | 28.5% | 9.7% | 65.7% |
| MyPlanIQ Diversified Core Allocation ETF Plan Tactical Asset Allocation Moderate | 0.3% | 6.3% | 7.9% | 132.3% | 7.8% | 69.2% | 7.6% | 64.5% | 11.2% | 93.7% |
*: NOT annualized
**YTD: Year to Date
| Symbol | 1 Yr | 3 Yr | 5 Yr | 10 Yr | Inception | 2012 | 2011 | 2010 | 2009 | 2008 | 2007 | 2006 | 2005 | 2004 | 2003 | 2002 | 2001 | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| AR(%) | P_19495 | 13.8 | 8.9 | 2.6 | 8.1 | 6.0 | 7.7 | 0.6 | 12.1 | 22.0 | -24.1 | 10.8 | 16.9 | 9.4 | 8.6 | 23.5 | -7.4 | 0.6 |
| P_39680 | 17.3 | 10.2 | 5.0 | 9.7 | 4.6 | 9.5 | 1.0 | 15.6 | 23.0 | -19.6 | 12.6 | 15.4 | 8.5 | 8.9 | 23.9 | -14.4 | -18.1 | |
| P_19489 | 7.9 | 7.8 | 7.6 | 11.2 | 9.8 | 6.3 | 1.2 | 8.7 | 17.3 | 0.5 | 23.3 | 17.8 | 10.6 | 8.5 | 17.8 | 3.1 | 2.3 | |
| SharpeRatio(%) | P_19495 | 118.7 | 76.2 | 14.9 | 57.5 | 39.8 | 102.1 | 4.8 | 113.2 | 131.9 | -113.6 | 78.3 | 156.4 | 118.8 | 89.9 | 227.5 | -62.6 | -24.0 |
| P_39680 | 140.4 | 84.6 | 28.5 | 65.7 | 21.4 | 111.5 | 7.4 | 129.4 | 127.1 | -91.5 | 91.8 | 150.0 | 99.2 | 105.3 | 220.0 | -92.5 | -67.2 | |
| P_19489 | 132.3 | 69.2 | 64.5 | 93.7 | 85.6 | 104.9 | 13.2 | 60.0 | 132.4 | -4.9 | 134.0 | 117.9 | 102.2 | 96.5 | 228.2 | 37.2 | 0.5 | |
| DrawDown(%) | P_19495 | 6.7 | 10.5 | 36.3 | 36.3 | 36.3 | 5.4 | 10.5 | 6.8 | 14.6 | 36.1 | 6.0 | 10.0 | 3.8 | 7.5 | 7.5 | 16.3 | 9.7 |
| P_39680 | 7.2 | 11.9 | 33.6 | 33.6 | 45.0 | 6.3 | 11.9 | 7.8 | 16.0 | 32.1 | 5.9 | 6.9 | 3.8 | 6.0 | 7.6 | 24.1 | 38.7 | |
| P_19489 | 4.8 | 10.5 | 11.2 | 14.1 | 14.1 | 4.8 | 7.5 | 10.5 | 5.7 | 11.2 | 10.0 | 14.1 | 5.1 | 7.6 | 4.3 | 5.8 | 0.0 |
The above compares the two strategic asset allocation portfolios with a tactical asset allocation portfolio. These portfolio's candidate funds include the following:
| LARGE BLEND | VTI | Vanguard Total Stock Market ETF |
| LARGE GROWTH | VUG | Vanguard Growth ETF |
| LARGE GROWTH | QQQ | PowerShares QQQ |
| LARGE VALUE | DVY | iShares Dow Jones Select Dividend Index |
| LARGE BLEND | VTI | Vanguard Total Stock Market ETF |
| LARGE VALUE | VTV | Vanguard Value ETF |
| LARGE GROWTH | VUG | Vanguard Growth ETF |
| MID-CAP BLEND | VO | Vanguard Mid Cap ETF |
| LARGE GROWTH | QQQ | PowerShares QQQ |
| LARGE VALUE | DVY | iShares Dow Jones Select Dividend Index |
| Mid-Cap Growth | VOT | Vanguard Mid-Cap Growth ETF |
| LARGE VALUE | VTV | Vanguard Value ETF |
| MID-CAP VALUE | VOE | Vanguard Mid-Cap Value ETF |
| MID-CAP BLEND | VO | Vanguard Mid Cap ETF |
| SMALL BLEND | VB | Vanguard Small Cap ETF |
| Mid-Cap Growth | VOT | Vanguard Mid-Cap Growth ETF |
| Small Growth | VBK | Vanguard Small Cap Growth ETF |
| SMALL VALUE | VBR | Vanguard Small Cap Value ETF |
| MID-CAP VALUE | VOE | Vanguard Mid-Cap Value ETF |
| Foreign Large Blend | EFA | iShares MSCI EAFE Index |
| Foreign Large Blend | VEA | Vanguard Europe Pacific ETF |
| SMALL BLEND | VB | Vanguard Small Cap ETF |
| Foreign Large Growth | EFG | iShares MSCI EAFE Growth Index |
| Small Growth | VBK | Vanguard Small Cap Growth ETF |
| Foreign Large Value | EFV | iShares MSCI EAFE Value Index |
| Foreign Small/Mid Value | SCZ | iShares MSCI EAFE Small Cap Index |
| SMALL VALUE | VBR | Vanguard Small Cap Value ETF |
| DIVERSIFIED EMERGING MKTS | VWO | Vanguard Emerging Markets Stock ETF |
| Foreign Large Blend | EFA | iShares MSCI EAFE Index |
| REAL ESTATE | VNQ | Vanguard REIT Index ETF |
| Foreign Large Blend | VEA | Vanguard Europe Pacific ETF |
| Global Real Estate | VNQI | Vanguard Global ex-US Real Estate ETF |
| COMMODITIES BROAD BASKET | DBC | PowerShares DB Commodity Idx Trking Fund |
| Foreign Large Growth | EFG | iShares MSCI EAFE Growth Index |
| Commodities Precious Metals | IAU | iShares Gold Trust |
| Foreign Large Value | EFV | iShares MSCI EAFE Value Index |
| SHORT GOVERNMENT | SHY | iShares Barclays 1-3 Year Treasury Bond |
| Foreign Small/Mid Value | SCZ | iShares MSCI EAFE Small Cap Index |
| LONG GOVERNMENT | IEF | iShares Barclays 7-10 Year Treasury |
| DIVERSIFIED EMERGING MKTS | VWO | Vanguard Emerging Markets Stock ETF |
| Intermediate Government | IEI | iShares Barclays 3-7 Year Treasury Bond |
| REAL ESTATE | VNQ | Vanguard REIT Index ETF |
| Intermediate-Term Bond | BND | Vanguard Total Bond Market ETF |
| Long-Term Bond | LQD | iShares iBoxx $ Invest Grade Corp Bond |
| Global Real Estate | VNQI | Vanguard Global ex-US Real Estate ETF |
| Short-Term Bond | CSJ | iShares Barclays 1-3 Year Credit Bond |
| COMMODITIES BROAD BASKET | DBC | PowerShares DB Commodity Idx Trking Fund |
| Intermediate-Term Bond | CIU | iShares Barclays Intermediate Credit Bd |
| Commodities Precious Metals | IAU | iShares Gold Trust |
| High Yield Bond | HYG | iShares iBoxx $ High Yield Corporate Bd |
| SHORT GOVERNMENT | SHY | iShares Barclays 1-3 Year Treasury Bond |
| Inflation-Protected Bond | TIP | iShares Barclays TIPS Bond |
| LONG GOVERNMENT | IEF | iShares Barclays 7-10 Year Treasury |
| WORLD BOND | WIP | SPDR DB Intl Govt Infl-Protected Bond |
| Intermediate-Term Bond | VMBS | Vanguard Mortgage-Backed Sec Idx ETF |
| Intermediate Government | IEI | iShares Barclays 3-7 Year Treasury Bond |
| WORLD BOND | BWX | SPDR Lehman Intl Treasury Bond |
| Intermediate-Term Bond | BND | Vanguard Total Bond Market ETF |
| Emerging Markets Bond | EMB | iShares JPMorgan USD Emerg Markets Bond |
| Long-Term Bond | LQD | iShares iBoxx $ Invest Grade Corp Bond |
| Short-Term Bond | CSJ | iShares Barclays 1-3 Year Credit Bond |
| ROOT | CASH | CASH |
| Intermediate-Term Bond | CIU | iShares Barclays Intermediate Credit Bd |
| High Yield Bond | HYG | iShares iBoxx $ High Yield Corporate Bd |
| DIVERSIFIED EMERGING MKTS | DEM | WisdomTree Emerging Markets Equity Inc |
| Inflation-Protected Bond | STPZ | PIMCO 1-5 Year US TIPS Index ETF |
| Inflation-Protected Bond | TIP | iShares Barclays TIPS Bond |
| Inflation-Protected Bond | LTPZ | PIMCO 15+ Year US TIPS Index ETF |
| WORLD BOND | WIP | SPDR DB Intl Govt Infl-Protected Bond |
| Short-Term Bond | VCSH | Vanguard Short-Term Corp Bd Idx ETF |
| Intermediate-Term Bond | VMBS | Vanguard Mortgage-Backed Sec Idx ETF |
| WORLD BOND | BWX | SPDR Lehman Intl Treasury Bond |
| Short-Term Bond | BSV | Vanguard Short-Term Bond ETF |
| Emerging Markets Bond | EMB | iShares JPMorgan USD Emerg Markets Bond |
| LARGE BLEND | VIG | Vanguard Dividend Appreciation ETF |
| ROOT | CASH | CASH |
| LARGE VALUE | VYM | Vanguard High Dividend Yield Indx ETF |
| DIVERSIFIED EMERGING MKTS | DEM | WisdomTree Emerging Markets Equity Inc |
| Inflation-Protected Bond | STPZ | PIMCO 1-5 Year US TIPS Index ETF |
| Inflation-Protected Bond | LTPZ | PIMCO 15+ Year US TIPS Index ETF |
| Short-Term Bond | VCSH | Vanguard Short-Term Corp Bd Idx ETF |
| LARGE VALUE | FVD | First Trust Value Line Dividend Index |
| Short-Term Bond | BSV | Vanguard Short-Term Bond ETF |
| Intermediate-Term Bond | BOND | PIMCO Total Return ETF |
| LARGE BLEND | VIG | Vanguard Dividend Appreciation ETF |
| LARGE VALUE | VYM | Vanguard High Dividend Yield Indx ETF |
| LARGE VALUE | FVD | First Trust Value Line Dividend Index |
| Intermediate-Term Bond | BOND | PIMCO Total Return ETF |
This is not an isolated case. In fact, the following shows the performance comparison chart between Cambria Global Tactical (GTAA), DWA Tactical (DWTFX) and Vanguard 60% stocks/40% bond balance index fund VBINX:
| Symbol | 1 Yr | 3 Yr | 2012 | 2011 | 2010 | 2009 |
| GTAA | 4.1 | NA | 4.9 | -7.3 | 2 | NA |
| DWTFX | 7.1 | 6.8 | 5.5 | -7 | 12.5 | 23.6 |
| SPY | 34.3 | 14.3 | 16.9 | 1.9 | 14.6 | 26.4 |
| VBINX | 21.6 | 11.1 | 10.9 | 3.6 | 13.1 | 20.1 |
In 2009, 2010 and 2012, the buy and hold portfolios have done better than actively managed tactical portfolios while in 2011, the tactical also lagged the US stock and bond balance fund such as VBINX.
So should one write off the tactical strategies again? Should investors become complacent and satisfied with strategic asset allocation? Well, it depends. If you look at more closely how the two types of allocation strategies behaved in the past, you will find that both strategies complemented with each other at different times.
First, if you look at longer term performance, tactical portfolios did perform better, especially in 2008 and 2001-2002. This is not surprising as tactical allocation tries to step through a bear market more carefully.
Secondly, the tactical portfolio usually lags in early bull markets (or in the phase of strong recovery out of bear market low). It then gradually catches up and eventually outperforms in the late stage of the bull market. For example, the tactical portfolio here did better than the two strategic portfolios from 2001 to 2002. It then lagged behind from 2003 to 2004. It caught up and outperformed again in 2005 to 2007 and then it did better again in 2008 (the bear market). It then underperformed again from 2009 to present.
The intuition behind this behavior is clear: in the initial phase of a bull market, the buy and hold equity portions in a portfolio contributes significantly to the upside, while in a tactical portfolio it slowly adjusted its risk asset exposure. In the middle of a bull market, secular trends are forming with trial and error attempts, and this results in the tactical portfolio's underperformance also. In the late bull market, all trends are set up and the tactical portfolio will ride on the strongest asset trends, which results in stronger performance. Finally, in a bear market, tactical portfolios reduced risk asset exposure, resulting in less loss.
From the above discussion, it is clear that strategic and tactical asset allocations should be complemented with each other. It is not an "all or nothing" or "either you or me" binary choice. This is consistent with our previous position in core satellite portfolios.
