The Tactical Allocation Method

                By Richard Morey
                January 2023


Guiding Principles

In the report,  I’d like to review the guiding principles we’re using in the Tactical Allocation Portfolio – which I’ll refer to simply as TAP– and how it’s designed and operated.

First, a little personal history. Early in my career I studied the math behind Efficient Set Theory, developed by Nobel-prize winning economist Harry Markowitz, who is widely considered an originator of Modern Portfolio Theory. Efficient Set Theory was applied in portfolio management primarily to quantify diversification and investment risk levels. Though ingenious, the theory possessed widespread flaws when put into practice (described by its creator in an interview I listened to 20 years ago). Because of inherent limitations, I disregarded it at the time.

However, over the last 10-15 years, several large quantitative investment strategies arose – most involving the exact same theory I knew so well but had discarded. After examining these new strategies closely, I realized that their superior quantitative approaches had accounted for at least the most obvious drawbacks of pure efficient set theory. The way they were using it was exactly how it was designed by Dr. Markowitz; however, they had added certain elegant algorithms to greatly enhance its value in risk management.

After enthusiastically resuming my study of this theory and its improvements, I saw how its remaining defects could be solved when applied to a diversified investment portfolio. This process has culminated in the following portfolio construction and management principles:

1. Safety

Our investment path is predicated on safety, first and foremost. This has been the strategy pursued by the greatest stock investor ever, Warren Buffett, and many of the best real estate investors. Safe investing is indeed the bedrock principle Secure Retirement has been founded upon since its inception.

Efficient set theory has come to dovetail with our core mission perfectly. We can now target our risk level precisely, assure it with various “floors,” and decrease the risk level when needed. In other words, we first target the risk level or volatility to be precisely what we want today. We then decrease that risk level when the expected returns fall and increase it – to a higher but still acceptable level – when the expected returns look favorable.

2. Safety

The chosen risk level then defines what we own. Right now, for example, TAP (our Tactical Allocation Portfolio) has a targeted Standard Deviation of 5.5. (Note that “Standard Deviation” indicates the numerical quantification of risk widely used by the financial industry.)

For those who prefer descriptors over numbers, “very safe” would be a fair description. In other words, since 5.5 characterizes our current portfolio, versus 21 for the S&P 500, our target portfolio is very close to being four times safer than the stock market, using this common risk measurement. Clearly, we are protecting against risk at this time.

3. Correlational Study

Our portfolio construction, defined and shaped by the risk level, is then guided by achieving maximum diversification. In our case, we’re taking diversification to an almost ultimate level by focusing on those few asset classes, each with long track records, that possess zero, or very modest, correlations with every other asset class in the world. This allows us to cut the standard deviation without changing the expected return (one of the primary goals of portfolio construction).

Actual Risk, the “Achilles Heel” of Traditional Diversification

The typical benefit of diversification is often of little value when actual risk hits. For example, a common “diversified” portfolio with 60% in stocks and 40% in bonds lost 17% last year, as both stocks and bonds fell sharply.

In “normal” times, which means in this case non-inflationary times, the 40% in bonds is a solid diversifier. This fact highlights the value of more advanced diversification methods. An investor diversifies to protect their assets. In fact, diversification is considered the only truly free thing in the investment world. However, the conventional 60/40 stock and bond combination failed completely on the risk-control side last year.

    • The Value of Active Management

Many of us have heard a thousand times we should just trust the markets will recover fairly quickly from downturns. This is, we are told, because the trajectory of the stock market is always up, up, and away. However, you only need study stock market charts showing the 14 years after historic bubbles to see the danger in this assumption. Yes, the markets will always recover—but it may take 10 or 20 years—and some positions may never regain anything near their former value.

In fact, at this point in time, the days of easy money, of “set and forget” portfolios, are likely behind us for the foreseeable future. Economies around the world are in the process of fundamental sea changes that have been a long time coming. We believe those changes will be difficult given the ingredients of debt and rising interest rates. The need for active investment management by seasoned professionals, with an informed “finger on the pulse of the marketplace,” will likely become apparent to everyone as these changes accelerate.

In our case, we don’t simply invest in the assets with the correlations we want and let them ride. Instead, we actively change the diversification in our portfolios based on what the correlations between the asset classes are doing in today’s market, with today’s momentum. This current correlational study is used to maximize return potential without increasing the risk level. It’s also used to reduce risk when needed.

4. Security Purchases

Once the risk level is set (for the current market scenario), and the portfolio is constructed to get the most benefit from diversification, the next task is to figure out which specific asset classes we expect to outperform.

For this important task, we combine two main approaches:

    • The first is following current momentum. Our goal is to find opportunities, at an acceptable risk level, that have recently established themselves in a trend likely to continue for some period of time. This could be for a month or a lifetime – either way the ideal is to spot trends likely to lead to the largest gains or losses, and then sell once each trend is exhausted. 
    • The second approach involves valuation study. The main reason this is so important – especially when managing retirement money – is that it allows us to spot the most extreme asset bubbles wherever they occur. This helps us prepare for their fallout, thereby protecting from the largest risks to investors. It also informs us how to invest after the markets finally reverse their decline from recessions.

Thus far we have only spoken about determining which asset classes to include in a portfolio. To determine the specific funds, stocks, bonds, or other securities to purchase in the chosen asset classes, we do our own independent research, using material purchased from leading financial data firms, free government sources, and even interviewing the fund, stock or bond managers themselves.

5. Portfolio Management

The final step is to combine the trend-following, momentum approach with the monitoring of valuations in real time. Unlike in 2022, when inflation created many confusing unknowns, and much of the yearly profits our funds made came right at the start of the year, this time around we’ve seen which assets are poised to profit as risk resumes. At the very least, we have a good idea which trends will continue, and which are now behind us. Much of the smoke has cleared, and we have been able to determine current market forces to a degree impossible back when inflation was just beginning to catch fire.

Now we can use a fairly simple approach designed to do more than only protect against loss. If you go against a market in a bubble as it establishes itself in the bursting phase, you can not only protect the principal but profit handsomely. That’s the goal for us as we face what we expect to be falling markets in 2023.

When markets finally bottom out from recessionary forces and begin a new cycle, our targeted risk levels will rise for clients hoping to take advantage of low stock prices. For those who will want to avoid stocks, we suspect anyone who preserves their money through the conclusion of this “megacycle” will confront a plethora of excellent investment choices.

Watch January’s webcast HERE


Because We Love to Make You Smile
(not just with investment returns):

1) Flying economy these days…

Flight Stewardess: Do you want a drink, sir?
Sir: What are my choices?
Flight Stewardess: Yes or No.

2. I just scored 170 on an online IQ test. The questions were tough, for example, here are some I remember:

A. What is your credit card number? Answer: _________________
B. What is your social security number?  Answer: ________________
C. What is your bank account password? Answer: _______________

3) A woman seated while flying in economy and holding her baby in her arms, was startled when the man sitting behind her bent forward to say “Ma’am that is one ugly baby you have there!”
The woman, wide-eyed and open-mouthed, was so shocked she could barely retort “Well I … I never!”
The man continued: “I’m just being honest with you ma’am, I mean, I’ve seen some ugly babies in my time, but yours is a real showstopper”.
Quite overwhelmed, the woman called a flight attendant over. “The man behind me just hurled the most hideous insult at me, and I demand to be moved to a different seat!” she said.
The attendant gave her a consoling look of sympathy. “I’m so sorry, but as you know our flight is fully booked and until we find someone willing to switch seats, I’m afraid I won’t be able to reseat you. We do apologize, however, and if you like, in the meantime we’d be happy to offer you anything from our in-flight menu free of charge.”
“Fine”, the woman said with an air of resignation, “but I’ve never been so insulted in all my life. What a horrible man!”
“Well, I just said the truth!”, could be faintly heard from the seat behind.
Hearing that, the attendant resolved to make the woman feel better as soon as possible, telling her, “Any item of food or any alcoholic or non-alcoholic beverage, whatever you choose, it’s on us”, she said.
“And if you like I’ll also bring a banana for your comfort monkey.”


The Defensive Growth Tactical Allocation Strategy is designed to capitalize on economic and market fragility, which has been brought about by central bank interventions, corporate debt levels, demographic shifts, business cycles and other factors.


These factors may express themselves as credit/ stock market events, potentially significant in the near term. The portfolio is a defensive yet opportunistic strategy.


This investment strategy can be combined with others to fit your needs. Please feel free to contact us if you would like to discuss and explore investment ideas and options.