Practical Considerations for DIY Tactical Investing
Tactical asset allocation is cool again. Cultivating a transparent, liquid, and repeatable strategy that betters indexing on risk and long-term performance is an obvious goal for individuals, foundations, companies, and governments we speak with. Some market-savvy individuals may even be familiar with popular asset allocation systems like dual momentum and risk parity, and want to DIY something smarter for themselves.
A few times a year we meet with prospective clients who ask “why can’t I just do this?” - and we tell them the truth - which is that they certainly can.
For intrepid traders, it’s worth exploring how much work is required to actually maintain such a portfolio and keep it in line with the selected strategy. A passive global portfolio is simple to run, as it may only require allocating generously to foreign stocks, REITs, and gold (in addition to US stocks and bonds) and rebalancing periodically. Such a portfolio will likely produce solid returns with less downside per unit of upside relative to a US focused 60/40 allocation favored by many advisors and DIY’ers alike.
Tactical momentum is a difficult and labor intensive style of investing, but by far the most rewarding. For that, you’ll need data and a spreadsheet or specialized software. Even the most basic trend system requires that you track dividend-adjusted ETFs prices and calculate their simple moving averages. However, this must be done every month after the close and no later than the next trading day. There are excellent online services that will run the calculations for you, such as portfoliovisualizer.com, but even this commitment may take more discipline than you think, as you may be ill, travelling, or have other commitments at the crucial time. Remember, orders must be executed on the close of the month or the next trading day, exactly as prescribed.
By far the most reliable solution, potentially offering a far better portfolio, is to outsource the whole thing to a professional asset manager. A good tactical manager will use many different products to track each geography and asset class, multiple trading parameters, and hopefully multiple tranches to reduce “timing luck,” all of which are free sources of improved risk-adjusted returns. Unfortunately for most investors, but not for our little club, exceedingly few professionals specialize in systematic tactical allocation. In contradiction to the theory that a winning system becomes useless once it is public knowledge, the incentives of the asset management industry discourage breaking from the herd. Career risk as a “meta-factor” delivers a premium to the investor commensurate with the compensation foregone to he who deviates too widely from popular benchmarks.
Whether to DIY or not is a personal decision. If you enjoy technical work and have the grit to learn this craft over many years, it may be worth the risk of errors and eluded gains while you up your game. Maybe you don’t even care about advancing beyond a beginner portfolio like those here, but you value simplicity and control. In these cases, we would say to go for it, so long as you can stick to the plan as though contractually bound. If you get that far, drop us a line - we’d love to have you work with us.
In my time in the markets, none of those who thought they’d try this on their own end up feeling it’s their calling Otherwise, managers like ourselves would be glad to have a fellow traveler as a client. To my knowledge.