TAA Investing


This post is a follow up to my last post on the pain factor in TAA strategies . In that post I compared the various TAA strategies by three common pain points that I hear from investors; taxes, number of trades, and turnover. In this post I want to incorporate the reward of TAA strategies into the rankings. Let’s dive in.

First, let’s take a simple approach approach. Let’s just add one of the performance metrics at a time to the rankings. I chose two performance metrics to add to the pain factor ranking, annual return and UPI. The results are below. As you can see from the table, several more TAA strategies jump above the 60/40 portfolio and the difference in rankings between adding UPI or CAGR are not a lot. I also added both metrics to the ranking at the same and the results are about the same. All the data below is from AllocateSmartly .

The rankings don’t change that much when adding either performance metric. But buy and hold definitely moves down the list to the number 6 position. This is an OK start but I am not a fan of this ranking method. I think it underweights performance by a long shot. Also, I think trades and turn over are highly related and redundant in the ranking. Just consider an extreme example. Does it make sense that Vigilant Asset Allocation Aggressive, a strategy with over 2x the return of buy and hold and less than half the drawdowns be ranked 25 spots below 60/40? No, not really. This is one of the issues with a simple ordinal ranking like this. So, let’s take a different approach.

For this approach, the first thing I do is to just use the number of trades and get rid of turnover since they kind of reflect the same thing. Next, I incorporate taxes directly into the return metric and calculate a tax-adjusted return for each strategy. We just need a short term and long term marginal tax rate to do the calculation. Then, I do the ranking using tax-adjusted returns, UPI, and number of trades. The resulting ranking, which I labeled “Return For Pain”, is in the last column of the table below.

Note: I used a 24% short term marginal rate and a 15% long term marginal rate to calculate the tax adjusted returns in the table. For US investors, those are the applicable 2021 marginal income tax and long term capital gain tax rates for investors classified as married filling jointly with incomes up to $329.8K and long term capital gains up to $496.6K. I also did the analysis using the next higher tax brackets, 32% income and 20% long term capital gains, and the top rankings stayed about the same. 

With this ranking method, which gives a greater weight to performance, as measured by after tax returns and UPI, many more TAA strategies beat buy and hold. 32 of the TAA strategies are ranked above the 60/40 portfolio. At the next higher tax brackets (32%/20%), 30 of the TAA strategies beat buy and hold. Not a huge difference. All in all, this ranking method just seems more logical to me. Taking our previous example, Vigilant Asset Allocation Aggressive is the 5th ranked strategy with this method. That makes a lot more sense to me.

That’s about it really. What do you think of this ranking method? Let me know in the comments. There is no one ranking method that is going work for all conditions. For me this is a good starting point to see how strategies compare from a high level before diving down and doing more research and considering other important factors like correlations and the asset class universe of each strategy.


P.S. Several people and many of my subscribers asked me how my other strategies rank, not just SPY-COMP. I added those strategies to the ranking and show the top 25 strategies in the table below. The important point to note is that all the metrics for my strategies, outside of the three strategies (SPY-COMP, Bond U1, and Tactical Bond) that are on AllocateSmartly, are calculated by me. I make every effort to follow the same methods but all the figures are my own. With that said, here is how the rest of my strategies compare. For more info on my strategies and services see the side bar on the blog. I’ve added the full table below to the portfolios page on the website.

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