Into the weeds

Risk vs, Return:
This post will get into the technical details about this strategies risk and return statistics.  It will focus on measures of risk and ratios that tease out risk adjusted returns.  It will show that the returns generated by this strategy have been achieved with less risk per unit of return than a blended portfolio.

Volatility Return Return/Vol* R1000    15.2%  7.64%     0.50 R2000    19.3%   7.71%     0.40 ML HY      8.1%  8.50%     1.05 BB Agg      3.9%  6.34%     1.65 TA Portfolio    12.8% 12.81%     1.00 Equal Weight Portfolio      9.8%  7.95%     0.81 * Return/Vol = risk adjusted returns

Volatility (Vol) is the industry standard for assessing the riskiness of a strategy, although I do not think it is a great measure of risk (that is a discussion for another blog). Vol measures how big of performance movements a security has. Higher Vol means bigger movements on a daily basis. Looking at data from 9/30/1986 through 4/30/2017 We find the information in the chart above.

A couple of things to note: 

1. You get paid less and less per unit of Vol as you take on more Vol (looking at the indexes)
2. The equal weighted portfolio has outperformed all but one of the indexes 
3. The TA portfolio is less volatile than either equity index and has outperformed everything
4. The TA portfolio gave a very high risk adjusted return, especially when considering the level of return.

Another way to look at risk is Tracking Error (TE). This looks at how returns vary relative to a benchmark or index. The TA portfolio will have a lot of TE because it will, at times, be 100% invested in one asset class while the index (Equal Weighted Portfolio) will only have 25% exposure to each index. These portfolios will have strong differences in returns. 

The TA strategy has performed much better in positive months and slightly worse in down months. The allocations are aggressive so this is not a portfolio that is going to be adding a huge amount of value in difficult markets. Overall, it has outperformed in 63% of the months, which may not sound like much but it is a great result in the investment world.  On average the outperformance and underperformance are slightly more than 1 percent.

There is no free lunch but the payout over the long term has been high for this strategy. Only time will tell if that continues into the future.

What could go wrong: 
This strategy benefits from changes that happen over a prolonged period of time (long term trends).  It will not react to or benefit from very short term moves. If the market begins adjusting more quickly (which could happen due to changes in investor behavior) it could pose a problem for this model going forward. That said, it has continued to perform in recent years and there have been quite a few spikes with quick rebounds.

For More Details:
If you want more background on the system start with the Tactical Allocation (introduction) blog, for a deeper look check out Diversification: Myths and Mastery blog and for ideas on how to implement (trade) the strategy see the Technical Stuff blog.

Other than that I post what I am going to do at month end and the following business day I post what my trades actually were and give a performance update.

Past performance is not a guarantee of future performance.  This strategy is presented for informational purposes only and is not a solicitation to buy or sell any securities. October is one of the peculiarly dangerous months to speculate in stocks in.  The others are July, January, September, April, November, May , March, June, December, August and February. ~ Mark Twain