Portfolio , Quant Investing , TAA Investing


In my recent overview post on the landscape of available buy and hold portfolios, I said I would come back with a comparison of all the portfolio types; buy and hold, tactical asset allocation (TAA), and quant investing portfolios. Here is that comparison.

I’m pretty sure I’ve discussed all the portfolios I compare in this post on the blog at some point but here is a list of the portfolios and some links for more info. Also, I have uploaded a spreadsheet to Google Drive that has more info on the data sources I used for the portfolios.

First, we’ll start off with a look at the various portfolios from the perspective of investors in their wealth building years. The most common and popular metric for comparing portfolios is compounded annual return. The table below sorts all the portfolios by CAGR.

Div Portfolios Summary Stats by CAGR Apr 2015

The quant and aggressive TAA portfolios lead the pack in terms of compounded annual return. The highest ranked buy and hold portfolio is the IVY buy and hold 13 portfolio. The equity only indexes, the SP500 and World Stocks rank in the middle to bottom half of the list. The most popular benchmark portfolio for institutions and investors, the 60/40 portfolio is also in the bottom half. Most investors focus too much on CAGR as a portfolio metric. If you can’t stick with a portfolio it doesn’t matter what it’s CAGR is. Other metrics like sharpe, or worst year do a better job of measuring the chances that an investor will be able to stick with a given portfolio. On these metrics the TAA portfolios stand out. For the buy and hold only devotees, the Permanent, RiskP, and All Season portfolios lead on a combination of these risk metrics. Now, lets turn our focus to investors in the portfolio withdrawal phase of their lives.

For investors withdrawing from portfolios I sort the portfolios by arguably the most important concern for those in the withdrawal phase – the SWR. The metric in the table is the estimated 1966 SWR for a 30 year period (see this post for details on this metric). Here is the table.

Div Portfolios Summary Stats by SWRs Apr 2015

The usual suspects lead the pack, quant and TAA portfolios with the leaders showing SWRs almost 2x the really only analyzed portfolios for SWRs, portfolios consisting is US stocks and US bonds. Note, that these SWRs are conservative estimates of true SWRs that would have been attainable from these portfolio since they are handicapped with 60/40 portfolio returns from 1966 to 1972. The second to last column in the table contains the first 10 year real portfolio return. This metric shows a 0.98 correlation to SWRs. See here for a discussion of early portfolio performance and it’s impact on SWR. Since SWRs are not readily available for any portfolio outside of US stock US bond portfolios this metric can be used as a good indicator as to how a given portfolio will perform in terms of SWR.

There you go. A comparison of 27 different portfolios from 1973 to 2013 using a variety of portfolio statistics. If there is one take away from this post is that there are many more and better choices for both investors building wealth and for investors withdrawing wealth than the most often talked about, promoted, analyzed, portfolios in the financial world – those consisting of only US stocks and US bonds.


Tagged , , , , , , , , , , , , , , , , , , ,

44 thoughts on “ Comparing buy & hold, TAA, and quant portfolios

  1. Paul,

    Just wanted to let you know i enjoy and learn much from your posts.
    Which would be the best portfolio or combination of for a taxable account?
    Keep up the great work.

    1. Thanks Trip. Can’t really answer that question. It’s a very personal decision based on risk tolerances, age, goals, etc…


  2. Assuming the 1973-2013 returns stay the same and looking at the GTAA 3 with the CAGR of 19.37 and an 8.63 SWR, is that suggesting that if I have expenses of 96,000 per year, theoretically I could retire with around 600,000? Seems way off to me.
    This is an over simplification but, here what I am looking at:

    600,000 – 96,000 = 504,000 and then add back a 19.37% return = 601,624.

    I realize that a few 3-4% return years in a row while withdrawing 96k would change this considerably, but if the 19.37 was consistent would this 600k hold up?

    Or should I just take the 96,000 in expenses and divide by the 8.63 to come up with a $1,112,399 next egg that is necessary to retire.

    1. SWR is based on a 30-year drawdown. Also, the SWR includes calculations for variations in annual return (such as the 3-4% possibility you cite). The SWR here is estimated based on a 1966 retirement date, which was particularly bad.

      So in theory *if returns didn’t get any worse* and you had 30 years of life expectancy, you could safely retire *1.2 million* in savings with 96k in annual expenses. You don’t use the CAGR for the reason you mentioned. That said, he has posted previously that he expects future returns to be lower.

      Personally, if I had 600k saved, I’d only retire if expenses were under 24k/year, even with an AGG 3 portfolio.

      1. Oops, forgot to mention that I made the personal comment I’m in my 30’s and would want the portfolio to last perpetually.

      2. If I were stating withdrawals today I wouldn’t use more than a 4% SWR either. In a future of potential/likely poor returns then the winning combo is a modern diversified or tactical portfolio combined with a conservative initial SWR. After a few years of ‘success’ you can always adjust the SWR higher.


    2. Your last number is the correct one. You would beed $1.12M to support $96K in expenses at an 8.63% SWR.


  3. Great work again, Paul. This is incredibly helpful. I’m also slowly working my way through your required reading list. But I’ve been meaning to ask -couldn’t find it in one of the blogs- how do you figure the returns on GTAA & AGG ETFs like VNQ that did not exist back in 1973?

    1. I don’t. I let others do it for me. In Faber’s work he shows the historical performance of the portfolios through 2012. I didn’t need to break the performance out into the sub asset classes. Post 2012 I can run the numbers in many ways since the ETFs all exist now.


  4. Hi Paul,
    Do you have the maximum drawdowns for all these portfolios somewhere else on your blog?
    Thank you again for all your posts, great blog!

    1. Hey Ben,

      No, not really. All the portfolio stats are based on yearly returns. The first year return is a decent proxy for max annual drawdown. The issue with drawdowns as a metric is it depends on the time frame you’re looking at. Max daily drawdowns > max monthly drawdowns > max yearly drawdowns. Since daily returns don’t exits for many of these portfolios it’s hard to put an accurate figure on it.

      Faber has a chart in his book, GAA, that has the max daily drawdowns for some of the portfolios.
      60/40: -39%
      El-Erian: -45%
      All Seasons, GAA, IVY buy and hold, Permanent, Arnot: -23% to -28%

      And from Faber’s GTAA paper, max daily drawdowns for GTAA5, GTAA13 are about -10%. GTAA AGG3 and AGG6 are about -20%.

      My rules of thumb are…a buy and hold portfolio that is equity heavy and/or has no real assets. max daily drawdowns will be on the order of -40%. A good diversified buy and hold portfolio about -25%. Then I use -15% to -25% for any GTAA portfolio.


  5. Paul,

    I am looking to pull the triger and put some money into GTAA AAG . The only thing that worries me somewhat is the low volumes for two of the top three MTUM and VGLT for this month. Have you had any issues buying or selling these lightly traded ETF’s when the chart gives the buy or sell signal?

    1. Hi Pat, No I have had no issues. I always use limit orders to make sure I don’t get gouged on the bid/ask spread. For bonds, you could use TLT vs VGLT. The expense difference is only .02% and the increased liquidity and volume is worth it IMO. Alternatives for MTUM, are IUSG and PDP. IUSG suffers from same low volume. PDP has bigger volume but carries a 0.65% expense ratio vs 0.15% for MTUM.


      1. Thank you Paul, I did get into MTUM as the price dropped today. Now it will be interesting to see if I can keep my eye off it until the end of the month..

        Thanks for sharing all of your work on these strategies!!

      2. Hi Paul,

        How do you use limit orders to not get gouged by the bid/ask spread? I am not sure how to select the price for the limit order (not too conservative) and get in the trade? I was under the impression that one buys at the opening price. I would appreciate your insight.

        Thanks again!


        1. Usually I just pick the middle of the bid/ask price, or what’s called the ‘mark’ price. And wait.
          There is never a guarantee of buying at the open if you use limit orders and the open price could be quite different than the previous closing price.


  6. Hi Paul,

    First off, I’m so thankful I found your site. I started AGG3 just this month. Please don’t tire of posting your monthly updates. 🙂

    I have another couple of small accounts where I don’t think it makes sense to invest in 3 ETFs. Is there such a thing as AGG 1 that I could possibly use? That is, only invest in the top ETF, as opposed to the top 3. Have you considered running the numbers for that?

    I hope my question makes sense.

    Thanks again!

    1. There is such a thing as AGG 1. The results are in the original study. In general you get higher returns but with much higher volatility and much higher drawdowns, higher than buy and hold even.


      1. Thank you, Paul. I’m sorry to be asking you this. I couldn’t find it. Where do I go to see the “original study” and its results?

        Thanks again!

  7. Hi Paul,

    Great post! I have been waiting for something like this that puts everything together.

    In some previous comments I have seen you say you allocate about 20-30% to quant strategies.

    I was considering doing something like this:

    80% GTAA AGG 6
    10% QI TV
    10% QI Cons Stpl/Util

    I am curious if you have looked at the correlations between these strategies. Using a variety of strategies seems like the way to go, but if these strategies are highly correlated then it would only be a false sense of diversity.

    Also, since these quant strategies are all equities you could end up with a 100% equity portfolio depending on the buy/sell signals for the AGG 6 (currently 5 out of 6 holdings in AGG 6 are equity ETFs).

    Any quantitative strategies you have found for bonds? Or aren’t they necessary?


    1. Hi Tony, Great question. Yes, I have looked at the correlations of these strategies vs the SP500. Funny, I removed the column from my table because I thought no one would be interested… 🙂

      GTAA AGG6 has a 0.46 correlation with the SP500. QI TV’s and CS/Util’s correlation with the SP500 is 0.72 and 0.71 respectively.

      Yes, I use a quant strategy for bonds. I posted on it here .


      1. Awesome! Thanks for those correlations. And that bond post is great. Not sure how I missed it.

        On another note, have you done much research on a shareholder yield strategy combined with a timing model? If buying individual stocks the turnover might be a bit much if done on a monthly, or even quarterly basis. However, I was considering just using SYLD and then buy/sell as the SP500 crosses the 10 month MA.

        I haven’t done any real analysis, but it appears this approach would help avoid the majority of the negative years. Not sure how it would impact the good years though.


  8. Hi Paul
    i’ve just discovered this blog and i find it really awesome. Great work!

    Are you aware of quant strategies that apply currency momentum over asset momentum?
    I mean, i’m Italian and my non € assets in the last couple of months have gone really good mainly because of the €/$ exchange rate. What if you you buy hedged ETF when your currency get stronger, and then switch to unhedged ETF when currency gets weaker (using SMA200 as trigger).
    I haven’t found on the web some sort of similar strategy.
    what’s your opinion?

    1. Thanks Giorgio.

      Momentum has been found to work in currency markets as well.

      There is a lot of debate and opinions about using currency hedged ETFs to invest in an asset class as well as their role in portfolios. I haven’t seen any studies looking back and see how they would have worked. The current ETFs that implement such strategies don’t have a very long history which makes testing the strategies difficult.


  9. Paul,

    Have you ever produced a correlation matrix that shows the historical correlations between the various quant strategies? I am running a version of GEM/GBM but I would like to segment my portfolio into 3 or 4 strategies. Wondering which combinations would provide the best risk return.



    1. Pauk, I’ve run correlations vs the SP500 but not a matrix with all the strategies. Maybe I’ll do that at some point. I can say this. The TAA strategies will be more correlated with each other than say vs diversified buy and hold. The diversified buy and hold strategies will correlate with each other.


      1. Thanks Paul.

        I agree with you. Without running numbers I would think that a good mix would be a TAC portfolio (like GSM or Agg 3/6), a long only portfolio like trending value and the Permanent Portfolio. These are 3 relatively different styles. The combination should provide a high SWR with good returns.

        Really enjoy and appreciate your work.


  10. I’ve noticed that worst year is shown much more than maximum drawdown, but this could overlook the fact that the worst year may not reflect a large drawdown and subsequent recovery or a drawdown that straddles several years. For me, maximum drawdown presents a better picture of risk. Is it technically more difficult to get that information or is it just more of a traditional way of presenting the data?

    1. John, you’re absolutely right on drawdown but with the data I have I’m dealing with annual returns only so max drawdown figures are impossible to calculate. Most of the longer term data series at best use monthly prices so at best you will only see max monthly drawdowns.


      1. In Faber’s paper, many tables have the heading “Sharpe(5.41%)”.
        What does the 5.41% mean?

  11. Do each of those portfolios include known expenses for the ones that have set expenses? For instance, GAA is only .29%, while Permanent is .9% or so. Is that included in the calculations?

  12. Hi Paul
    Just discovered this site. Great information. Where can I find the detailed rules for the GTAA AGG3 portfolio?

    1. Steve, I first covered the AGG3 and AGG6 portfolios here . I recommend reading Meb’s original paper as well.


  13. Hi Paul,
    Is the Permanent portfolio in this blog (stat tables) the exact same portfolio you follow in the monthly updates. I mean the TAA version (monthly rebanlancing)?
    Thanks, Andre

    1. Hi Andre,

      The Permanent Portfolio in the stats tables is the buy and hold version.


  14. Paul, what an awesome blog and service of yours!! I am wondering what your opinion of Faber’s GMOM and GAA new funds is?? Do you have a preference? I know they are very new, but curious what your sense is regarding how well you expect them to replicate the original 5ETF momentum in terms of max drawdown and upside potential. It is nice having a simple fund that one’s wife could take care of with no effort, but wonder how comparable they can be expected to be.. thanks much, Marty

    1. Hi Marty,

      GMOM is basically similar to AGG3 or AGG6 but it’s more like AGG16 and uses a larger pool of asset classes. I’m not convinced it worth it for the fees. I prefer AGG3. GAA is a buy and hold portfolio of the global market. It’s a better benchmark than 60/40 but that’s about it. It has no risk management.


Comments are closed.