Target Drawdown Series FAQ Spotlight: How the Reallocation Process Works

4 years ago

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Why do some Target Drawdown Portfolios add risk, while others reduce risk during the same reallocation? Shouldn’t all portfolios add risk at the same time? And likewise, shouldn’t all portfolios reduce risk at the same time?


At Cabana, we reallocate portfolios and the assets that they contain in response to a variety of fundamental (economic) and technical (price) indicators. We are periodically asked why some portfolios seem to add or reduce risk, while others do the opposite. This is a great question and worthy of some explanation.

To start, you should know that this situation occurs most often when we are in a generally bullish scene. We call these scenes “Bullish” or “Moderately Bullish”. Visit our Allocation History Page for information on Cabana’s various scenes and corresponding allocation.

What happens in a cyclical bull market?

During a cyclical bull market for stocks, markets tend to take two steps forward for every one step back. In other words, markets make new highs, pull back as investors take profits, and then resume the uptrend as money rotates back into the market to then make another new high. This is a normal and healthy process and is a result of investors constantly assessing potential return relative to perceived risk.

How does this common market behavior apply to the allocation of Cabana’s Target Drawdown Portfolios?

During a cyclical bull market, where our portfolios have made new highs (as was the case at the end of Q3) and the market took “two steps forward,” only to be followed by “one step back” (as was the case during the first week of October), we often are signaled to reallocate – which we did on Friday, October 4.

When this happens, our more conservative portfolios (e.g. Target Drawdown 5, 7 or 10) are reallocated to less risky assets in order to protect the gains, and most importantly, to protect the drawdown number. This is necessary even considering the possibility (or even statistical likelihood) that the “one step back” is just part of the process described above, and the bull market will in time resume its uptrend, thereby causing us to miss out on some bargains and resulting gains.

Conversely, our more aggressive portfolios (e.g. Target Drawdown 13, 16 or 20) have more room to fall before their all-important drawdown number is threatened. As such, they can take advantage of the possibility that the “one step back” is part of the normal bull market process and therefore, can reallocate to some of those beaten down or out of favor (risky) assets. This explains how those portfolios can make up for their increased volatility and produce higher returns over time.

The short answer:

In sum, the more conservative Target Drawdown Portfolios can’t take the chance that the “one step back” is not the beginning of something worse, like a bear market. The more aggressive Target Drawdown Portfolio can take that chance up until it becomes two or three steps back! At that point, they must also defend their drawdown number and remove the potential for additional loss by removing risk. The aggressive portfolios just didn’t have to remove the risk as quickly.

This same process works in reverse as markets improve. The more conservative Target Drawdown Portfolios put risk back on slower than the portfolios at the more aggressive end of the risk spectrum.


January 17, 2024

This material is prepared by Cabana LLC, dba Cabana Asset Management and/or its affiliates (together “Cabana”) for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. This material may only be distributed in its original format and may not be altered or reproduced without the prior written consent of CabanaThe opinions expressed reflect the judgement of the author, are as of the date of its publication and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Cabana to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Cabana, its officers, employees or agents.  

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Commonly used index/benchmark definitions:  

All indices and categories are unmanaged and an individual cannot invest directly in an index or category. Index returns do not include fees or expenses. Benchmark indices will likely materially differ from Cabana’s portfolio strategies. Detailed information as to how the returns are calculated can be obtained online from the following link: 

Morningstar’s Moderate Target Risk index  follows a moderate equity risk preference and is based on well-established asset allocation methodology from Ibbotson Associates, a Morningstar company.  

Morningstar’s Tactical Allocation category includes portfolios that seek to provide capital appreciation and income by actively shifting allocations across investments. These portfolios have material shifts across equity regions, and bond sectors on a frequent basis. 

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The Nasdaq Composite Index is a market-weight capitalization index that covers more than 3,000 stocks listed on the Nasdaq Stock Market. What is the Nasdaq Composite, and What Companies are in It? | Nasdaq