Does switching on signals pay off?
Tactical models move money by fixed rules, for example out of stocks when the price drops below its moving average. Portfolio Lab tests eleven such models against buy and hold.
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How it works
With trend following, a building block stays invested as long as its price is above its average of the last few months; otherwise the money moves to a safe asset. Momentum models pick the building blocks that did best over the last few months, and target volatility adjusts the stock share to the volatility.
Every signal uses only prices up to that month end, with no look into the future. Trades happen at month end or one month later, with trading costs per order. The comparison is the base portfolio, simply held and rebalanced monthly.
Tactical rules often promise smaller drawdowns but cost return in long bull markets. Because you can try out many rules, the overfitting check tests whether a good result might be luck.
What a result looks like
Sample dataMade-up sample data, no real prices and no recommendation. Calculated with the same methods as the tool itself.
Inputs in this example
Locked: you can't change the inputs in the preview.
Run your own numbers with a free account Your own inputs, real data and every setting.
Create accountTiles: model / buy and hold. Switches = months in which the model changes its allocation.
Key metrics
From the first trade (09/2006), calculated monthly.
| Metric | Trend following (10 months) | Buy and hold |
|---|---|---|
| Final value | $34,666 | $45,001 |
| CAGR | 6.7% | 8.1% |
| Volatility p.a. | 12.2% | 14.3% |
| Max. drawdown | -19.2% | -33.6% |
| Sharpe ratio | 0.43 | 0.48 |
| Sortino ratio | 0.70 | 0.77 |
| Best year | 25.1% | 25.1% |
| Worst year | -6.4% | -25.1% |
Performance
$10,000 at the start, after trading costs.
Decline from peak
Trend following limits deep drawdowns but misses part of the recovery.
Invested or cash
Share of Global equities in the model each month.
Assumptions: Signal at month end from made-up prices, traded at the same closing price (slightly optimistic), cash earning 2% p.a., trading costs of 0.1% per order, no taxes.
Frequently asked questions
What is tactical asset allocation?
A strategy that changes the weights based on signals instead of keeping them fixed. The goal is usually to avoid large losses or to ride strong trends.
How does the moving average work as a signal?
At month end the price is compared with its average over the last few months, often 10 months. If it's above, the money stays invested; otherwise it moves to cash or bonds.
Does trend following beat buy and hold?
Not reliably. In long crises it has often limited losses; in sideways markets false signals and trading costs eat into returns. The backtest shows both for your building blocks.
What is overfitting?
When a rule is tuned to the past until it shines there but really just captures noise. The overfitting check estimates how likely that is.
Learn more in the knowledge base
- MethodologyTactical allocation methodology: how the eleven tactical models work
- ArticleTrend following: riding each asset's own trend
- ArticleMarket timing: can you pick the right moment?
- ArticleTactical allocation: momentum, dual momentum and trend following
- ArticleStrategic and tactical asset allocation and the total portfolio approach
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