Tactical Asset Allocation with Monthly Momentum Signals

Summary

The document introduces tactical asset allocation (TAA) as a systematic, relatively low-frequency approach to adjusting a diversified portfolio. It contrasts TAA with both buy-and-hold investing and short-term trading, and describes potential benefits such as simple rules, lower turnover, ETF access, and long investment horizons. It also notes that investors can combine strategies through an additional portfolio-weighting layer.

Its example is a dual-momentum rule comparing 12-month returns for US equities, international equities, and Treasury bills. Each month, the investor selects the stronger equity market if it beats bills; otherwise, the rule selects bills. The text argues that this is straightforward to implement and presents momentum as its rationale. It also discusses drawbacks: asset-class returns must be forecast, results can depend on the rebalance date, equity exposure can create high market sensitivity, and all-in allocations may raise trading costs. The example is concentrated in one asset class at a time and does not establish that historical outperformance will persist.

Key ideas

• Tactical asset allocation adjusts portfolio weights periodically using systematic signals.
• Many TAA approaches use liquid ETFs and rebalance monthly or less often.
• The example compares 12-month returns across US equities, international equities, and Treasury bills.
• If neither equity option beats bills, the example allocates to bills.
• Rebalance timing, equity concentration, and turnover can materially affect outcomes.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.