All investment strategies involve risk, including the potential loss of principal. This page outlines both general investment risks that apply to any portfolio, and risks specific to tactical allocation approaches like the one Caldric Capital uses.
We believe informed investors make better long-term partners. Understanding these risks—and how our systematic framework seeks to address them—is essential before considering any investment approach.
Learn how our methodology addresses these risks| Category | Description | Risks |
|---|---|---|
| Tactical Allocation Risks | These risks are specific to systematic tactical allocation strategies, including regime-based and trend-following approaches. | 5 |
| General Market Risks | These risks apply to virtually all investment portfolios, regardless of strategy. | 3 |
| Asset Class Risks | These risks are inherent to specific asset classes that may be held in any diversified portfolio. | 6 |
| Implementation & Execution Risks | These risks relate to how investments are traded and managed, with some heightened by tactical approaches. | 4 |
| Tax-Related Risks | Tax considerations that may be amplified by higher-turnover tactical strategies. | 2 |
| Firm-Specific Operational Risks | These risks relate specifically to Caldric Capital's structure and operations. | 3 |
| Behavioral & Expectation Risks | Risks arising from investor behavior and expectations, which can affect outcomes regardless of strategy performance. Learn more about common behavioral biases that affect investment decisions. | 2 |
These risks are specific to systematic tactical allocation strategies, including regime-based and trend-following approaches.
The risk that economic regime identification is incorrect or delayed, leading to inappropriate asset allocation for current conditions. Macro indicators may give conflicting signals, or regime transitions may occur faster than the systematic framework can detect. Misclassification can result in being positioned for growth during contractions or defensively during expansions.
The risk of incurring repeated small losses when markets lack directional persistence. Trend-following systems generate buy signals that are quickly reversed by sell signals (or vice versa) during choppy, range-bound markets. The strategy may exit positions at a loss only to re-enter shortly after at worse prices.
Because trend-following strategies react to price movements rather than predict them, signals inherently occur after a trend has begun or ended. This lag means the strategy may miss initial gains at trend inception and absorb initial losses at trend reversal before repositioning.
The risk that quantitative models or third-party data inputs are incorrect, incomplete, or become less effective over time. Errors in signal generation or market data can lead to inappropriate asset allocation decisions. Historical backtests may not reflect future performance as market structures evolve.
During sustained bull markets, a defensive tactical posture may significantly underperform a fully-invested buy-and-hold approach. Clients must accept periods—potentially years—of lagging a benchmark in exchange for potential downside protection.
These risks apply to virtually all investment portfolios, regardless of strategy.
The risk that broad market declines affect all holdings regardless of individual security characteristics. Even diversified tactical portfolios cannot fully eliminate losses during severe market dislocations, particularly rapid crashes that occur faster than rebalancing cycles.
The risk that market price swings exceed model assumptions, triggering erratic signals or magnifying losses. High-volatility regimes can increase both trading frequency and drawdown severity.
Actions by central banks, geopolitical events, or systemic financial crises may cause market conditions that differ materially from historical patterns on which models are trained. Unusual correlations may emerge (e.g., stocks and bonds declining simultaneously).
These risks are inherent to specific asset classes that may be held in any diversified portfolio.
The risk that stock prices decline over short or extended periods due to company-specific, sector, or macroeconomic factors. Equity investments are subject to price volatility regardless of tactical positioning.
The risk that rising interest rates decrease the value of fixed-income holdings. Bond ETF prices move inversely to interest rates; sudden rate shifts can cause significant NAV declines in bond allocations.
The risk that bond issuers default on principal or interest payments, or experience credit rating downgrades that reduce bond values.
The risk of price volatility in commodities markets due to supply/demand imbalances, geopolitical events, weather, or currency fluctuations. Commodity ETFs (including gold) can experience sharp drawdowns.
If cryptocurrency ETFs (e.g., Bitcoin) are utilized: these assets have limited performance history, extreme price volatility, evolving regulatory frameworks, and lack the decades of academic research supporting traditional asset classes. Cryptocurrency allocations are speculative and may experience drawdowns of 50% or more.
If international ETFs are utilized: the risk of adverse currency movements, less transparent markets, political instability, or regulatory differences in foreign jurisdictions.
These risks relate to how investments are traded and managed, with some heightened by tactical approaches.
The risk that securities cannot be quickly converted to cash without significant price concession, particularly during market stress when trading volumes decline and bid-ask spreads widen. This is especially relevant for sector-specific or fixed-income ETFs.
ETFs are subject to tracking error relative to their underlying index, potential trading at premium or discount to NAV, and the layering of fund expenses on top of advisory fees. Shareholders indirectly bear the ETF's operating expenses.
Tactical strategies inherently trade more frequently than buy-and-hold approaches. Higher turnover results in increased brokerage costs, wider bid-ask spread costs, and potential market impact costs for larger accounts.
The risk that the fixed rebalancing schedule (e.g., periodic) does not align with market regime changes. A regime shift mid-cycle means the portfolio remains mis-positioned until the next scheduled rebalance date.
Tax considerations that may be amplified by higher-turnover tactical strategies.
Frequent trading generates short-term capital gains taxed at ordinary income rates rather than lower long-term capital gains rates. This reduces after-tax returns compared to strategies with lower turnover. Tax efficiency varies significantly by account type (taxable vs. tax-advantaged).
Legislative changes to capital gains rates, wash-sale rules, or retirement account regulations could adversely affect the after-tax performance of tactical strategies.
These risks relate specifically to Caldric Capital's structure and operations.
For smaller RIAs: the risk that key personnel incapacity, departure, or firm dissolution disrupts portfolio management continuity.
Strategies relying on institutional research providers face the risk that the research provider discontinues service, materially changes methodology, or experiences data delivery failures.
The risk of data breach, system failure, or unauthorized access affecting trading systems, client data, or custodial accounts.
Risks arising from investor behavior and expectations, which can affect outcomes regardless of strategy performance. Learn more about common behavioral biases that affect investment decisions.
The risk that clients abandon the strategy during periods of underperformance, thereby crystallizing losses and missing subsequent recovery. Tactical strategies require discipline through full market cycles to realize their risk-adjusted benefits.
Clients comparing tactical strategy returns to inappropriate benchmarks (e.g., 100% equity index during risk-off positioning) may become dissatisfied despite the strategy performing as designed.
No investment strategy guarantees profits or protection from loss. Past performance does not guarantee future results. Before investing, clients should carefully consider their investment objectives, risk tolerance, and time horizon.
Have questions about these risks?
If you have questions about how these risks apply to your specific situation, we encourage you to contact us.
Contact UsOr take our Portfolio Fit Assessment to explore your risk posture.
Important: Caldric LLC d.b.a. Caldric Capital is registered as an investment adviser with the Mississippi Secretary of State. Registration as an investment adviser does not imply a certain level of skill or training. This content is for informational and educational purposes only. The risks described apply generally to tactical allocation strategies and are not a complete list of all possible risks.
