Adaptive Asset Allocation (AAA)

Jun 2007 – Sep 2026	Strategy	SPY
Annual return (CAGR)	10.1%	10.9%
Worst drawdown	-21.9%	-55.2%
Sharpe ratio	0.93	0.62
Volatility	11.1%	19.7%
Annual return since publication (Aug 2012)	8.6%	14.9%

Adaptive Asset Allocation (AAA) was introduced in 2012 by Adam Butler, Michael Philbrick, Rodrigo Gordillo, and David Varadi. They argued that the classic fixed-weight portfolio relies on long-run averages that rarely hold in practice. Instead, AAA adapts to the market as it is now. Momentum chooses what to own, and recent volatility decides how much of each.

The idea#

A traditional portfolio, such as 60/40 or an equal mix of asset classes, sets its weights once and assumes that returns and risks stay stable. The AAA authors showed that recent returns and recent volatility forecast the near future better than long-run averages do. So a portfolio can do better by updating both every month.

AAA combines two well-documented effects:

Momentum. Assets that have done well over the last several months tend to keep doing well for a while.
Risk balance. Sizing positions by their recent volatility keeps one volatile asset from dominating the portfolio's risk.

How it works#

At the close of the last trading day of each month:

Rank ten asset classes by their six-month return. The ten are US stocks (SPY), European stocks (VGK), Japanese stocks (EWJ), emerging markets (EEM), US real estate (VNQ), international real estate (RWX), intermediate Treasuries (IEF), long Treasuries (TLT), commodities (DBC), and gold (GLD).
Keep the top five.
Weight them by inverse volatility: each fund's weight is proportional to one divided by its volatility over the last 60 trading days, so calmer assets get more.

This is the momentum and volatility-weighted version shown in the primer's Exhibit 4. The authors' headline version goes further and uses minimum-variance weights, which also account for how the assets move together. Tactfolio's engine does not have a minimum-variance optimizer, so we list the Exhibit 4 version and say so.

What the backtest shows#

Over the ETF era AAA beat both the S&P 500 and a 60/40 portfolio on risk-adjusted return, with a worst drawdown less than half the S&P 500's. It gained in 2008, when the S&P 500 lost more than a third.

Since the primer was published in 2012 it has kept a solid risk-adjusted return, a little below a 60/40 mix's. Its raw return has trailed the S&P 500 through the long run of US stock leadership. It had a hard 2022, when stocks and bonds fell together and momentum offered few safe places, and it has led the S&P 500 since the start of 2025.

When it struggles#

Stock and bond sell-offs together. With both falling, the top five by momentum can still all be losing.
Trend reversals. Six-month momentum is slow to leave a leader that has just turned.

Using it on Tactfolio#

The live strategy above runs these rules on daily data. Copy it to try a different lookback, a different number of holdings, or your own set of ten asset classes.

Year by year

Year	Strategy	SPY
2026*	17.8%	14.0%
2025	21.1%	17.7%
2024	9.3%	24.9%
2023	10.4%	26.2%
2022	-15.0%	-18.2%
2021	21.7%	28.7%
2020	15.8%	18.3%
2019	10.2%	31.2%
2018	-3.6%	-4.6%
2017	20.1%	21.7%
2016	7.8%	12.0%
2015	-5.9%	1.2%
2014	4.0%	13.5%
2013	12.7%	32.3%
2012	9.1%	16.0%
2011	9.7%	1.9%
2010	16.5%	15.1%
2009	17.3%	26.4%
2008	8.5%	-36.8%
2007*	16.0%	-1.9%

* Partial year.

The rules as implemented

This is the exact tree Tactfolio runs, rebalanced monthly with signals and trades at the close. Open it to inspect or copy it.

Sources and caveats

Follows the primer's Exhibit 4: top 5 of 10 by six-month return, weighted by inverse 60-day volatility. The primer's headline minimum-variance weighting is not used.
VGK stands in for EZU as European stocks.
Signals and trades use the close of the last trading day of each month, as in the source.

Common questions#

What is Adaptive Asset Allocation?#

It is a strategy from Butler, Philbrick, Gordillo, and Varadi (2012). Each month it holds the five strongest of ten global asset classes by six-month return, weighted so that less volatile assets get more capital.

Is this the minimum-variance version of AAA?#

No. It follows the primer's Exhibit 4, which weights the top five by inverse 60-day volatility. The minimum-variance version also uses correlations between assets.

Which ETFs does Adaptive Asset Allocation use?#

SPY, VGK, EWJ, EEM, VNQ, RWX, IEF, TLT, DBC, and GLD. VGK stands in for EZU as the European stock fund.

How often does AAA rebalance?#

Monthly, at the close of the last trading day.