A major benefit of robust Tactical Asset Allocation strategies is that they should generate consistently competitive returns in all market environments. It probably won’t be the best performer. It should be far from the worst performer.
Not all TAA systems are created equally. Remember…Past performance is not indicative of future results. Relying exclusively on backtests is dangerous.
It’s important to look for systems that are designed to navigate all market regimes.
What are market regimes? Market regimes are persistent market conditions. Think of it like seasons in Wisconsin.
Would you wear the same type of outfit year around?
If not, why would you hold the same assets at the same time in every market environment?
If we think about the investment environment from 1980 to 2020, we’ve seen growth in the equities market and falling interest rates. All we know is that stocks and bonds rise together.
If you told someone from the 1930s, 1940s, and 1970s that this is how investing worked, they might question your sanity.
For a deep dive into this, listen to Meb Faber’s interview with Chris Cole from June 2021. While this is a great episode, they get a little deep into the weeds at times. Listen for the historical context and the reasons to care about market regimes.
I was first led to the idea of market regimes by Ray Dalio, a popular hedge fund manager.
Ray Dalio set out to create a portfolio that could last 100 years.
Why? Because he’s made a lot of smart macro calls during this career, but what happens to his family’s trust money when he can’t make those calls?
This led to the All-Weather portfolio. Note – the basket of assets that Ray created is one feature that I look for in a TAA system. If you use Allocate Smartly you can find this strategy within the list of strategies.
The idea behind the All-Weather portfolio is that it could navigate all market regimes. In his paper on this portfolio, he defined four quadrants of economic regimes:
- Higher than expected inflation
- Lower than expected inflation
- Higher than expected growth
- Lower than expected growth
Market regimes can last decades but within those regimes, there can be instantaneous shocks.
Resolve Masterclass podcast dives into this idea in a podcast series. In fact, I’m a huge fan of their entire series. There are a lot of good lessons in there.
The most important thing to remember with investing for all market regimes is to prepare… don’t predict.
There are only a few people who have been successful in predicting market directions. Ray Dalio, Jeremy Grantham, and Stanley Druckenmiller, to name a few. Each is a genius investor.
If you’re not a genius macro-economic investor or a genius at knowing who a genius macro-economic investor is, you must prepare for all market regimes.
The beauty of robust TAA systems is that you don’t have to predict. A robust TAA system will align with the correct outcome in real-time.
Don’t predict. Prepare.
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