8 common mistakes when following a tactical investment strategy (and how to avoid them)
Understanding a tactical strategy is the easy part. The hard part is following it for years without sabotaging it. These are the most common mistakes, ordered from the one that does the most damage to the one that does the least.
1. Skipping an uncomfortable signal
It is the most frequent mistake. The signal takes you out of the market just before a rise, or puts you in just before a fall, and the temptation to ignore it is enormous. A tactical strategy only makes sense if applied in full: part of its historical return comes from months that, seen one by one, turned out to be uncomfortable. If you know you will not obey a signal, do not follow it.
2. Changing the rules halfway
Adding an asset, removing another or changing the momentum period after seeing a bad year is adjusting after the fact. The original backtest no longer describes what you are doing. If you want to test a variant, do it separately and with the same rigour, not with your money.
3. Choosing the strategy by its best year
It is common to focus on the return of the best period or on the highest CAGR. Look also at the maximum drawdown, the volatility and the time spent in the safe asset. We explain it in the guide to metrics: a somewhat lower return with a much smaller drawdown is usually easier to stick with.
4. Trusting the backtest blindly
A backtest describes how a rule would have worked in the past. It does not include all real costs, or your taxes, or your execution timing, and it may be overfitted to the data. More in the risks of backtesting.
5. Ignoring costs
Rotating every month generates trades. With a small portfolio, minimum commissions can eat a significant part of the edge. Do the sums with your own numbers before starting: the real cost of rotating.
6. Forgetting taxes
Every sale at a gain may be taxable, and wash-sale-type rules can stop you claiming a loss if you rebuy the same product. Check how your country taxes gains before trading large amounts.
7. Rebalancing tiny amounts
If the signal asks you to move 1% of the portfolio, the commission can cost more than you gain. Define a threshold (for example, ignore differences below 5% of the target weight) and always apply it the same way.
8. Putting more money in the strategy than you can bear to see fall
All strategies have drawdowns. One that historically fell 15% may fall more in future. Ask yourself how much you could lose, in dollars, without changing plan. If the answer makes you uncomfortable, reduce the amount.
A practical rule
Before you start, write down on a sheet:
- Which strategy you follow and with which specific assets (tickers).
- When you trade (the first business day of the month, for example).
- What threshold you rebalance at.
- What you will do if the signal is uncomfortable: obey it.
Having it in writing avoids deciding in the heat of the moment. The monthly routine step by step works as a template.
Frequently asked questions
Is it a mistake to change strategy if one goes badly for a year?
Not always, but switching only because of a recent bad result is the thing that most resembles chasing past performance. Decide with criteria defined in advance, not with the last year.
Can I follow several strategies at once?
Yes, but it multiplies orders and costs. Compare how much each would add before including it; the comparison tool helps you see it.
How long do I have to follow a strategy to judge it?
Momentum strategies can trail a passive portfolio for years. Judging them over one or two years is too little; think in complete market cycles.
Is this advice?
No. The site offers educational and informational content; the decisions and their risks are yours.