Winners Repeat, Losers Repeat

Abstract

I present a tactical asset allocation proof-of-concept portfolio. It is intended to harvest the non-IID statistical attributes of stocks, bonds, commodities, and currencies, both domestic and international. It has as its objective to benefit from markets’ propensity to trend from month to month and during both bull and bear market environments. The proof-of-concept portfolio relies on a simple quantitative rule that allows for rigorous evaluation over the past 102.1 years. The results presented herein suggest that Tactical Asset Allocation (TAA) is an approach worthy of consideration. Moreover, the article suggests that a necessary condition for TAA success lies in correctly specifying its rather differentiated investment objective—one that may be unrelated to comparisons with popular fixed-weight index benchmarks. Such fixed-weight benchmarks have correlations with TAA strategies that are so low as to make commonly used statistical comparisons irrelevant (i.e., not statistically significant). This article attempts to correct our industry’s mischaracterization and overpromising of all things TAA by focusing on the time required for success.