Fintech executive, writer, math geek, and investment systems developer. Founder and CEO of Altruist and Founder of FormulaFolios.

Tactical Asset Allocation - My Way

Tactical Asset Allocation - My Way

Thank you to those who completed the survey I posted yesterday.  I've had tons of responses and plan to utilize the information in a way that benefits my clients and blog readers. One of the overwhelming leaders in responses so far has been for more information on what my statistics based models think the market is going and what positions they're taking as a result.  Well, one of the models I created is designed to give asset allocation suggestions based on how various global financial markets are performing.

The model has three primary measurements:

  1. The momentum (positive or negative) of various asset classes over the past 6 and 12 month time frames

  2. The risk associated with each asset class based on being either overbought or highly volatile in recent months

  3. The relative attractiveness of the asset classes that "pass" items one and two on this list

Here's the markets we currently rank:

  • Large Cap US Stocks

  • Mid Cap US Stocks

  • Small Cap US Stocks

  • Technology Stocks

  • Emerging Market International Stocks (think China, India, Brazil, etc)

  • Commodities (think metals, food, energy, etc)

  • Real Estate

  • US Government Bonds

  • Global Bonds

  • Cash / Money Market

After the month of August the model had the largest change in suggestions since the bear market of 2008 and subsequent recovery that started in early 2009.  While I don't normally tell people exactly what we're holding as a result - today I'll make an exception.  In this particular model we'll be holding (as of 9/1/2011) the following positions for a Moderate (think 60% growth, 40% income proxy/benchmark):

46.9% Cash 40% Global Bonds 6.7% Commodities 3.6% Real Estate 2.8% Technology Stocks

In a nutshell, this particular model is getting very defensive.

I should make note that this is not a recommendation for investors.  It's simply what we're doing with a portion of the money we manage for our clients based on a proprietary math based model I developed.

This type of asset allocation is referred to as "Tactical Asset Allocation" or TAA.  Instead of keeping a static buy and hold type of portfolio, the TAA approach seeks to protect assets from falling markets by getting defensive in times we feel various assets are too risky, and over-weights the areas of the market we feel are strongest in times the market is largely strong.

Using the exact parameters used to determine the allocation I shared above this model would have largely side-stepped the bear markets of 2000-2002 as well as 2007-2009.  It doesn't light the world on fire with huge returns, but is designed to get better than market returns over a long time period with lower risk (think more than 5 years when I say long term).  Of course past performance is no guarantee of future results and no model alone is capable of beating the market all the time or always avoiding market losses.  There's risk in any investment strategy.

For full disclosure I feel it's important to reiterate that we only use this approach for a portion of our clients assets, generally less than 20% of an entire portfolio.  We are definitely not moving this heavily to cash and bonds across the board.  Other models are still fully invested while others are equally if not more defensive.

So there you have it.  I asked for clients and readers what would be most beneficial for them and many people were willing helpers.  I'll do my best to continue to deliver this type of feedback as a result.

If you have any questions or comments please feel welcome to use the comment box below.  It's confidential and you don't even have to share your real name if you wish to remain anonymous.  Lastly, if you know someone who might benefit from my blog please feel free to recommend it by either using the Facebook or Twitter icons on the site or just by sending an email with my blog address (

Thanks and have a great balance of the week,

Jason Wenk

Market Update - September 9, 2011 - The importance of trusting your system

I need your help - Investor Survey 2011