Larry Swedroe on the Failure of Tactical Asset Allocation Funds

Not many people can truly do tactical asset allocation (TAA) correctly.  Because it’s hard.  Oftentimes prospective new clients will come to us and complain that their discount brokerage-recommended advisor is too plain vanilla and never sells or gets tactical.  I explain to them that this is a good thing – because the last thing they should want is a traditional FA trying to trade the market for them.  They simply aren’t equipped with the tools, signals and know-how to do so on a regular basis.

The twelve-year secular bear market has allowed for a flourishing of TAA mutual funds as investors have given up on buy-n-hold in droves.  The problem is, these funds aren’t doing them any favors favors either.  Notorious active management skeptic Larry Swedroe shows us some astonishing facts via a Morningstar research report on tactical asset allocation funds;

In its most recent issue of “Morningstar Advisor,” the investment researcher updated an earlier study on TAA funds that showed that 70 percent of funds underperformed the Vanguard Balanced Index Fund (VBINX). Did the rough markets we saw last year give TAA funds a chance to redeem themselves? Apparently not. Again using VBINX as the benchmark, Morningstar found:

  • Very few TAA funds generated better risk-adjusted returns than VBINX.
  • Just nine of the 112 TAA funds in existence over the period August 2010-December 2011 had higher Sharpe ratios (a measure of risk-adjusted returns).
  • Only 27 funds experienced smaller peak-to-trough declines than VBINX.
  • Only 14 of the 81 tactical funds in existence since October 2007 posted lower maximum drawdowns during the 2008 financial crisis, the spring/summer 2010 correction, and the recent European debt-related downtown. Put another way, just 17 percent of them consistently provided the insurance investors were paying for.
  • In a simulation of various hypothetical portfolios over the 10-year period ending December 2011, the average TAA fund would have provided very little in the way of incremental diversification.

Bottom line: TAA fund investors incurred heavy fees because of the active management, and returns were poor. In short, we have another game where the winners are product purveyors, not investors.

The lesson here is that just because someone claims to be tactical, it doesn’t mean they’re any good at it.




This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here:

Please see disclosures here.

What's been said:

Discussions found on the web
  1. Blue Coaster33 commented on May 04

    Thorn of Girl

    Great facts is often discovered on this world wide web blogging site.

  2. click here commented on Sep 14

    … [Trackback]

    […] Information on that Topic: […]

  3. คอนโดเงินเหลือ commented on Sep 18

    … [Trackback]

    […] There you will find 24715 more Information on that Topic: […]

  4. w88 commented on Sep 20

    … [Trackback]

    […] Find More here to that Topic: […]

  5. immediate edge review commented on Sep 29

    … [Trackback]

    […] Here you will find 35856 more Info on that Topic: […]

  6. bitcoin evolution review commented on Oct 03

    … [Trackback]

    […] Read More to that Topic: […]

  7. Mossberg Firearms for Sale commented on Oct 14

    … [Trackback]

    […] Info on that Topic: […]

  8. commented on Oct 19

    … [Trackback]

    […] Read More Info here on that Topic: […]

  9. td banking online commented on Dec 13

    … [Trackback]

    […] Find More Info here on that Topic: […]

  10. 토토 commented on Dec 25

    … [Trackback]

    […] Read More Info here on that Topic: […]

  11. KIU commented on Jan 05

    … [Trackback]

    […] Find More to that Topic: […]

  12. DevOps services commented on Jan 12

    … [Trackback]

    […] Read More Information here to that Topic: […]

  13. Quality engineering commented on Jan 18

    … [Trackback]

    […] Read More here to that Topic: […]

  14. tangerine login website commented on Jan 20

    … [Trackback]

    […] Info to that Topic: […]

  15. replica watches commented on Jan 23

    … [Trackback]

    […] Find More on that Topic: […]