Tactical vs passive investing: is it worth rotating your portfolio every month?
The honest question is not whether a tactical strategy "wins" in a backtest, but whether it pays off in real life, with costs, taxes and discipline.
What each approach offers
| Passive (S&P 500, 60/40, Permanent) | Tactical (HAA, BAA, GEM) | |
|---|---|---|
| Trades | 0-1 a year | Up to 12 a year |
| Costs | Minimal | Commissions + spreads |
| Taxes (ETFs) | Minimal | High |
| Dependence on rules | None | High |
| Protection in a crisis | None or partial | Tries to take you out of risk |
| Risk of "going against the grain" | No | Yes |
Results side by side
(Each strategy is measured from its own start date; to compare over the same period, use the comparison tool.)
| Strategy | Annual | Max drawdown | Sharpe |
|---|---|---|---|
| HAA Balanced | 9.7% | -9.3% | 0.92 |
| BAA-G12 (Bold Asset Allocation) | 7.5% | -13.4% | 0.77 |
| Dual Momentum (GEM) | 9.4% | -19.9% | 0.67 |
| Permanent Portfolio | 7.0% | -15.7% | 0.76 |
| 60/40 Portfolio | 8.5% | -26.8% | 0.84 |
| Faber GTAA 5 | 4.5% | -11.1% | 0.50 |
| VAA-G12 (Vigilant Asset Allocation) | 7.1% | -29.6% | 0.61 |
| VAA-G4 (Vigilant Asset Allocation) | 6.9% | -22.1% | 0.57 |
| DAA-G12 (Defensive Asset Allocation) | 7.6% | -19.2% | 0.75 |
| LAA (Lethargic Asset Allocation) | 9.8% | -18.9% | 0.96 |
| Accelerating Dual Momentum | 12.5% | -34.9% | 0.77 |
| All Weather Portfolio | 6.7% | -21.1% | 0.67 |
| Bogleheads Three-Fund Portfolio | 7.8% | -21.0% | 0.71 |
| Golden Butterfly | 7.5% | -17.8% | 0.78 |
| Coffeehouse Portfolio | 7.0% | -19.5% | 0.61 |
| S&P 500 | 10.8% | -50.8% | 0.72 |
What tactical strategies bring
Mainly a smaller maximum drawdown and lower volatility. In years when the market falls, the tactical portfolio has often been in the safe asset.
What they cost
- Taxes: in a taxable account, rotating ETFs is taxed. In the worst case (high turnover, high marginal bracket), the impact can subtract one or two points a year.
- Commissions and spreads: small per trade, but they add up.
- Time and discipline: you have to execute every month, even when the signal is uncomfortable.
- Model risk: if the momentum effect weakens or the environment changes, the strategy can do worse for years.
Criteria for deciding
- Your horizon: if you invest over 25 years and will not look at the portfolio, a passive one may be enough.
- Your tolerance for drawdowns: if a 40% drop would make you sell, a tactical strategy may help you stay the course.
- Your tax situation: in a tax-advantaged account, rotating is much cheaper.
- Your wealth: with small amounts, fixed commissions weigh more.
A reasonable approach
Many investors use a combination: a passive core (for example, index funds) and a small part devoted to the tactical strategy. That limits model risk and the tax impact.
Frequently asked questions
Do tactical strategies always beat the S&P 500?
No. In strong bull markets they tend to lag; their value is protection in drops.
How much money should I devote to a tactical strategy?
We cannot give personal recommendations. As an order of magnitude, many investors prefer a moderate part of their portfolio, not all of it.
Is HAA or the 60/40 better?
It depends on the criterion: in the backtest, HAA offers a higher return and a smaller maximum drawdown, but with turnover, taxes and complexity that the 60/40 does not have.