Use a Tactical Overlay to Provide

Drawdown Insurance for Buy & Hold Strategies

What do clients want? Clients want ALL the gains with NONE of the risk.

Of course there is no such investment tool, product, or strategy that can provide all of the upside with none of the risk. The question is whether a tactical overlay can help clients avoid large losses? We think after you learn about how tactical overlays work, you will say yes!

Mitigating risk in the stock market

To download a 49-page Investment Risk White Paper where the author literally go into chapter and verse on how to quantify investment risk and the ways to mitigate that risk.

Click here to read the white paper.

This is an 11-page paper explaining the power and protective nature of using a tactical overlay on passive investments.

Buy & Hold aka the Modern Portfolio Theory (MPT)

The investment risk white paper also breaks down the numbers of buy/hold strategies. For decades advisors have used a version of the MPT in an attempt to hedge risk in the stock market. Many clients are placed in a 60/40, 40/60, 70/30, or 30/70 mix of stocks to bonds. But does it work? Does by and hold give clients the best risk adjusted rate of return over time?


What most people don’t realize is that there can be significant risk when investing in a MPT/buy/hold type portfolio.

Let’s look at how a typical 60/40 mix would have done during the last two major stock market crashes. I’ll use the Vanguard Total Stock Market Index Fund (VTSMX) with 60% of the money and the Vanguard Total Bond Market Index Fund (VBMFX) with 40% of the money. The time frame is from July 2000 to January 2011. The following image shows two large drawdowns in the example portfolio.

The previous maximum drawdown chart is from the OnPointe Risk Analyzer software and the numbers are monthly valued (the drawdown is worse when using weekly or daily valuation). The OnPointe Risk Score of a 60/40 domestic blend of stocks to bonds is 42 (moderate risk). The CAGR (Compound Annual Growth Rate (how the money would have actually grown)) over this example time frame was 3.68%.


What would clients think of the previous chart and the two significant drawdowns over a ten year period while yielding only 3.68%? They wouldn’t like it.


One way to further mitigate the risks in the market is to use Fixed Indexed Annuities (FIAs) as an asset class (in place of bonds). This paper doesn’t cover FIAs although the OnPointe Risk Analyzer software does the best job in the industry of showing the value of using FIAs to hedge risk without sacrificing yield (as compared to bonds or other “safe money” tools). To watch a tutorial video of how to incorporate FIAs into an overall financial plan using OnPointe, click here.

In the market investments

While it would NOT be prudent for most investors to have “all” of their money “in the market,” in the 60/40 blended portfolio example, 60% of a client’s money is in the market. The money could be spread between small cap, large cap, micro cap mutual funds, index funds, etc. It could also be in individual stocks.

The following is the same chart as before but for the S&P 500 (monthly drawdown numbers from July 2000 to January 2011). The drawdown chart for the S&P 500, of course, is much worse than a 60/40 blended portfolio when looking at the last two stock market crashes.

The OnPointe Risk Score is 72 for the S&P 500 (SPY) (high risk). The CAGR over this example time frame was 0.64%.

The CAGR with both the SPY and 60/40 blended portfolio did NOT include a money management fee that an advisor would charge to manage the money.

Using tactically managed strategies to mitigate risk

Tactical money management has been in vogue since 2002 (after the last big stock market crash). Some advisors are big fans of tactical money management, some don’t believe in it, and some use both tactical and passive strategies for clients. Far too many advisors exclusively use a buy and hold/MPT platform.


What is a good definition for tactical money management? Some use the term “active money management.” It’s an investment style where the managers have developed algorithms or indicators that tell them when the stock market is getting risky. When the indictors signal the market is getting too risky, most of the managers will go to cash or move money to AGG (U.S. Aggregate Bond Index).


When the stock market starts an upward trend and if the tactical managers, due to the indicators or algorithms that think the trend is sustainable, they will move money back into the market to partake in the upside growth.


Does it work? Well, some say it works until it doesn’t, but there are several good tactical managers out there who have a proven track record of mitigating downturns while still generating an acceptable rate of return over time (there are also others who have not proven their signals work on a consistent basis so do your due diligence).


The following is a drawdown chart from an interesting tactically managed strategy from July 2000 to January 2011. You’ll initially notice that there is only one larger drawdown over the time frame instead of two and that the severity of the drawdown is much less.

The point of this website is to help get the word out to advisors not only about tactical money management as a viable platform to help their clients, but also about the use of a tactical overlay on passive investment strategies.


Advisors who use indexes such as the SPY in a portfolio, the question is would clients pay 35 basis points for a tactical overlay for what is essentially stock market crash insurance?


We think the answer is yes and we encourage all advisors to sign up to learn more about the tactical overlays discussed on this site or about creating a custom overlay for your passive investment strategies.

OnPointe Software 

OnPointe is the most unique program of it's kind. It's the most real world investment risk tolerance software, but it also does so much more. OnPointe has a CRM, email blasting system (with optional content), landing page program, and soon it will have its own PFM program. 

$ 50 mo

  • Full CRM suite
  • Up to five users
  • 1,000 contacts
  • 7,500 emails a month
Try 14 Days free trial

$ 100 mo

OnPointe Risk Analyzer
  • Real World Scoring Metrics
  • Calculates Investment Risk Tolerance
  • Score and Compare Investments
  • Personal back-end
  • Premium support
Try 14 Days free trial

$ 50 mo

OnPointe Email
  • Full email contact suite
  • One custom template
  • 2,500 contacts
  • 10,000 emails a month
Try 14 Days free trial

Turning a passive strategy into a tactical one by using a tactical overlay

The limitation with tactically managed strategies is that there are a limited number of “quality” tactical managers in the industry. If we had to put together a list of “quality” tactical managers, we’d put it at less than 20. However, when using a tactical overlay on a passive investment, the there are no limits on the strategies that can take advantage of using a tactical overlay. 

Frequently Asked Questions

Since the concept of using a tactical overlay is new to most, we wanted to offer some FAQs. 

It’s simple—a tactical overlay is something that can be placed on top of a passive/buy/hold strategy. When the tactical overlay’s signals kick in because market conditions are getting risky (or the market could already be in the midst of a downturn), you liquidate some or all of your position in the passive/buy/hold strategy and place the money in cash or AGG.

The question to answer is whether clients should ever take more risk than is necessary to reach your investment goals? If no (which is the answer 100% of the time), then using a tactical overlay on certain passive investments will make sense.

Not really. There are few in the industry that offer tactical overlays. There are many tactical managers who have their own unique style, but it's something quite different to use a tactical overlay than can be placed over any passive investment.

Whereas tactical overlay #1 is primarily an all-in or all-out signal, tactical overlay #2 can be used by advisors who may want to only take a portion of a strategy to cash, AGG, or a short position.

Still have a question? Reach out to us:

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Use a Tactical Overlay to Provide Drawdown Insurance for Buy & Hold Strategies

© Tactical Overlay, Wealth Preservation Institute  The WPI