Lethargic Asset Allocation (Keller’s LAA)

Lethargic Asset Allocation (LAA) is a low-turnover portfolio from Wouter Keller, published in December 2019. Three quarters of it never change: US large value stocks, gold, and intermediate Treasuries at 25% each. The last quarter holds the Nasdaq-100, and moves to short-term Treasuries only when unemployment is rising and the S&P 500 is in a downtrend at the same time.

The idea#

Keller wanted a portfolio that rarely needs a trade, hence "lethargic". It starts from a permanent-portfolio style mix of stocks, gold, and bonds, which holds up in very different economies. Only the riskiest quarter is timed, using Growth-Trend Timing: stay invested unless unemployment is above its 12-month average and the S&P 500 is below its 10-month average.

The paper designed the rules on 1949 to 1981 and tested them on 1981 to 2019. Because both signals must agree, the timed quarter switches rarely.

How it works#

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

1. 25% US large cap value stocks (IWD), 25% gold (GLD), and 25% intermediate Treasuries (IEF).
2. 25% in the Nasdaq-100 (QQQ), or in short-term Treasuries (SHY) when both the unemployment rate (FRED UNRATE) is above the average of its last 12 readings and the S&P 500 (SPY) is below its 10-month average (a 210-day average here).

The unemployment rate counts from its release date, as first reported. The paper says rebalancing only when the signal switches changes little; this version rebalances every month.

What the backtest shows#

The ETF-era test starts in late 2004, when the gold fund begins. Since then LAA returned about 10% a year, against 11% for the S&P 500 and 8% for a 60/40 stock and bond mix. Its worst drawdown was about 20%, against 55% for the S&P 500 and 33% for the 60/40, and its risk-adjusted return was well above both.

It lost 3% in 2008, when the S&P 500 lost 37%. Its worst drawdown ran from December 2021 to October 2022, when stocks, bonds, and gold all fell, and it recovered in March 2024. It trails the S&P 500 in strong bull markets such as 2013 (6% against 32%) and 2021 (11% against 29%).

Since publication at the start of 2020 it has returned about 10% a year.

With simulated fund history the test starts in 2000, when the value fund begins, and returns about 9.5% a year, against 8.7% for the S&P 500. It gained 4% in 2002, when stocks lost 22%.

When it struggles#

• Stock and bond sell-offs together. In 2022 rising rates hit its bonds and stocks at once, and the timing never switched because unemployment was falling.
• Strong bull markets. Only a quarter is in growth stocks, so it lags far behind in years when stocks run.
• Slow timing. Unemployment and a 10-month average both react late, so the timed quarter misses fast crashes.

Using it on Tactfolio#

The live strategy above runs the paper's funds and signal with FRED data. Copy it to rebalance less often, change the core mix, or compare it with the Permanent Portfolio and Keller's more aggressive Resilient Asset Allocation.

Year by year

* 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

• Wouter J. Keller, Growth-Trend Timing and 60-40 Variations: Lethargic Asset Allocation (LAA) (2019)

• Holds IWD, GLD, and IEF at 25% each, and QQQ or SHY for the last 25%, as in the paper; the switch uses the unemployment rate (FRED UNRATE) above its 12-month average together with SPY below its 10-month average.
• The paper notes that rebalancing only when the signal switches, the "lethargic" part, changes little; this version rebalances every month.
• The source compares the month-end close with its 10-month average; this version uses the daily 210-session average, the closest daily equivalent.
• Each economic figure counts only from the day it was first published, and as first reported: at a month end the latest figure is the previous month's, the one-month lag the source describes.
• Signals and trades use the close of the last trading day of each month, as in the source.

Common questions#

What is Lethargic Asset Allocation?#

It is Wouter Keller's low-turnover portfolio: 25% each in value stocks, gold, and intermediate Treasuries, plus 25% in the Nasdaq-100 that moves to short-term Treasuries when unemployment is rising and the S&P 500 is below its 10-month average.

Why is it called lethargic?#

Because it barely trades. Three quarters of the portfolio are fixed, and the timed quarter switches only when two slow signals agree, which happens in few years.

What ETFs does LAA use?#

IWD, GLD, IEF, and QQQ, with SHY as the defensive holding for the timed quarter, the funds the paper names.

Does Lethargic Asset Allocation still work?#

Since publication at the start of 2020 it has returned about 10% a year, with its worst drawdown in 2022. The live record on Tactfolio shows how it is doing now.

Related strategies

• Growth-Trend Timing (Philosophical Economics’ GTT)
• Growth-Trend Timing with unemployment (GTT-UE)
• Growth-Trend Timing with job growth
• Growth-Trend Timing with housing starts and income