Defense First by Tom Carlson Overview

Defense First turns the usual order of tactical asset allocation around. Most tactical strategies own stocks by default and step aside when a risk signal fires. Defense First starts from the other end. Each month it ranks four defensive assets: long Treasuries, gold, commodities and the US dollar. It holds the strongest at 40%, 30%, 20% and 10% of the portfolio. Stocks get only the slots whose defensive asset is losing to cash.

Dual Momentum Systems tracks it because that inversion makes it a genuinely different return stream. It is not another variation on "own equities until the trend breaks." A strategy that begins from defense, and lets offense fill in only where defense has nothing to offer, is worth measuring on the same data and costs as everything else here.

The Backstory

An actuary's view of risk

Tom Carlson came to systematic investing from the pension world. He is a former actuary and retirement executive who now works in pension automation, so he has spent decades thinking about liabilities, drawdowns and what a portfolio has to survive rather than what it might earn. Defense First reads like a product of that background. Its first question is not how to capture the upside but which kind of trouble the market is in.

He published the strategy in July 2025 as Defense First: A Multi-Asset Tactical Model for Adaptive Downside Protection. He placed the rule set in the public domain, and the paper drew wide attention among tactical allocation researchers within weeks of posting.

No single safe haven

The paper's starting point is an observation most investors learned the hard way in 2022. The traditional safe havens are not reliably safe. Long Treasuries protected portfolios in nearly every equity decline for forty years and then fell alongside stocks when inflation returned. Gold can go nowhere for a decade. A portfolio that hard-codes one defensive asset is betting that the next crisis looks like the last one.

Carlson's answer is to hold several defensive assets, each tied to a different kind of macroeconomic stress, and let momentum decide which one is doing its job:

• Long Treasuries for deflationary or disinflationary shocks and Federal Reserve easing.
• Gold for monetary instability and falling real interest rates.
• Commodities for inflation and supply shocks.
• The US dollar for global funding stress and flight to safety.

None of these works every time. The bet is that in most environments at least one of them does, and that momentum is a reasonable way to tell which.

Defense first, offense second

The second idea is what gives the strategy its name. When a defensive asset is not even beating Treasury bills, its slot does not sit in cash. It moves to US stocks. When defense is not working, the reasoning goes, the environment is usually not hostile, and stocks are the productive place for that money.

The result is a portfolio whose stock exposure is set entirely by the defensive assets. When all four are strong it holds no stocks. When the defensive assets fade it can hold up to 100% stocks. Over the full history here it has averaged roughly a third.

A revision DMS tested and does not carry

In October 2026 Carlson published a revised version that replaces the S&P 500 fallback with a leveraged blend. Half goes to a 2x Nasdaq-100 fund at all times, and the other half rotates between that fund and an anti-beta fund. Over his January 2013 test window the revision looked remarkable.

Dual Momentum Systems rebuilt it and extended the test back to 1980. Over the full history its worst drawdown was about -42%, nearly all of it in the 2000-2002 bear market. Its risk-adjusted return was lower than the original's. Because this site is built around risk-adjusted performance, only the original Defense First is carried here.

Core Strategy Logic

Defense First is evaluated once a month. Signals come from month-end data and set the holdings for the following month.

Step 1 - Score the defensive assets

For each of the four defensive assets and for Treasury bills, compute the 1, 3, 6 and 12-month total returns and take their plain unweighted average. Several Keller and Keuning strategies use the same 13612 average.

Step 2 - Rank and weight

Rank the four defensive assets from strongest to weakest and assign 40%, 30%, 20% and 10% of the portfolio by rank.

Step 3 - The cash test (absolute momentum)

Any defensive asset whose score is below the Treasury bill score gives up its slot, and that weight goes to the S&P 500 instead. A slot is either its defensive asset or stocks, never cash.

The full portfolio is rebalanced monthly whether or not the selection changed.

The universe as implemented here

Role	Asset
Long Treasuries	20+ year Treasuries (TLT)
Gold	gold (SGOL)
Commodities	diversified commodities (PDBC)
US dollar	US Dollar Index (UUP)
Equity fallback	S&P 500 (VOO)
Cash hurdle (signal only)	Treasury bills (BIL)

Two implementation notes belong in the open.

Ticker substitutions. The paper uses GLD for gold, DBC for commodities and SPY for stocks. This site uses its standard fund for each of those exposures, as it does across every strategy here. The exposure is the same; the specific fund is chosen for data quality and consistency.

Long history from reconstructed data. The US dollar fund launched in 2007. Before that, its returns are rebuilt from the published currency weights of the US Dollar Index plus the interest-rate carry the fund earns, using Federal Reserve data. The reconstruction tracks the live fund closely over their overlap. The other funds use this site's standard extended histories.

Performance Highlights

Over the full published history:

January 1980 through September 2026, net of trading friction:

	CAGR	Max Drawdown	MAR
Defense First	+10.8%	-16.8%	0.64
Triad	+15.5%	-13.9%	1.11
S&P 500	+12.0%	-51.0%	0.24

Defense First nearly matches the index's return with about a third of its worst decline, which is very close to what the paper set out to deliver. Its record through the major equity crises is the real story. It finished the 2000-2002 bear market roughly flat while the S&P 500 lost 38%. It gained through the 2008 financial crisis while the index lost half its value. It was positive in 2022, when stocks and bonds fell together and many defensive strategies failed. Its deepest drawdown came in early 1980, when gold and commodities reversed sharply from their highs, not during a stock market crash.

Triad is the comparison that shows what a different design buys. It reaches a higher return with a smaller worst decline by building breadth into its structure rather than rotating among defensive assets.

The same three, measured from January 2000:

January 2000 through September 2026, net of trading friction:

	CAGR	Max Drawdown	MAR
Defense First	+10.1%	-15.0%	0.67
Triad	+15.1%	-8.7%	1.73
S&P 500	+8.1%	-51.0%	0.16

From 2000 Defense First's lead over the index widens, since this window starts just ahead of two of the worst bear markets on record, and stepping aside from those is exactly what the strategy is built for. Treat that start date with the usual suspicion: it flatters anything defensive.

Two cautions apply as always. A strategy that holds stocks only when defensive assets are weak has no stock-trend test of its own, so it can add stocks during a decline that the defensive assets have not yet registered. And a single figure spanning decades says nothing about the order the returns arrived in, which is most of what an investor actually experiences.

Portfolio Characteristics

• Defense sets the risk level. Stock exposure is whatever the defensive assets leave behind. It ranges from 0% to 100% and has averaged about a third.
• Four distinct hedges. Treasuries, gold, commodities and the dollar each respond to a different kind of stress, so the strategy is not exposed to the failure of any single safe haven.
• Graduated, not binary. The 40/30/20/10 weights mean the portfolio shifts one slot at a time rather than all at once.
• Low correlation to stocks. Its monthly returns have a correlation of roughly 0.5 with the S&P 500, which makes it a useful diversifier alongside equity-led strategies.
• Holds the US dollar. It is the first strategy on this site to own the dollar directly. The dollar moves little month to month, so its slot contributes more stability than return.
• Monthly rebalancing. Every month resets the weights, whether or not the ranking changed.
• No leverage. Defense First never holds a leveraged fund.
• Best suited to tax-deferred accounts. Monthly rebalancing generates short-term gains, and gold is taxed as a collectible. In a taxable account, plan accordingly.
• Fully mechanical. Every allocation follows from published rules with no discretionary override.

Who It's For

Defense First is designed for investors who want:

• A portfolio built around surviving bad markets first, with stock exposure as the remainder rather than the default.
• Protection that does not depend on any one safe haven working.
• A return stream that behaves differently from equity-led tactical strategies.
• Smaller drawdowns than the index without giving up most of its long-run return.
• A rules-based process with no market-timing judgment calls.

It is a poor fit for investors who want steady stock exposure, who would be uncomfortable holding a large position in gold, commodities or the dollar for months at a time, or who trade in a taxable account and are sensitive to short-term gains. Investors who want stronger risk-adjusted results from a structure with breadth built in should compare it with Triad. Those drawn to holding several defensive assets in fixed proportions rather than rotating among them should look at Permanent Portfolio DMS.

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Defense First originates in Tom Carlson's research and is presented here as an independent implementation, with the fund substitutions described above. Dual Momentum Systems is not affiliated with or endorsed by Tom Carlson. More information on the strategy from its developer, including the original paper, is available at SSRN.

Past performance, including backtested results, is not indicative of future results. Backtested performance is hypothetical, does not reflect actual trading, and benefits from hindsight in the selection of strategy rules. Portions of the long-term history rely on reconstructed proxy data for funds that did not exist for the full period. Investors should carefully consider their risk tolerance and consult with a financial advisor.

For the latest details, visit www.DualMomentumSystems.com