Defense First: The Strategy That Inverts Traditional Allocation
Most tactical strategies begin with an equity portfolio and retreat to bonds or cash when conditions deteriorate. Defense First does the opposite. Developed by Thomas Carlson and published on SSRN, this strategy treats defensive assets — long-term Treasuries, gold, commodities, and the US dollar — as its primary holdings and only rotates into equities when those defensive positions weaken below the T-bill rate. The result is a portfolio that spends most of its time in assets that benefit from uncertainty, adding stock exposure as an enhancement rather than a default.
This inversion is not merely philosophical. Over 18 years of backtested data, Defense First has delivered a 10.38% CAGR with a maximum drawdown of -14.8% and a Sharpe ratio of 1.13. More notably, it posted positive returns during every major crisis of the past two decades — the 2008 financial crisis, the 2020 COVID crash, the 2022 rate shock, and the 2025 tariff crisis. That pattern is not coincidental: it is the direct consequence of starting from assets that tend to rally when equities fall.
How Defense First Works: The Inverted Logic
Primary Universe: Defensive Assets
Where a conventional momentum strategy ranks equities and retreats to bonds, Defense First ranks four defensive assets by their trailing momentum and allocates to the strongest ones:
| Asset | ETF | Role |
|---|---|---|
| Long-Term Treasuries | TLT | Flight-to-quality during deflationary recessions |
| Gold | GLD | Monetary debasement hedge, geopolitical safe haven |
| Broad Commodities | DBC | Inflation hedge, supply-shock beneficiary |
| US Dollar Index | UUP | Global crisis hedge, dollar strength during panic |
Each month, all four assets are scored using the K13612U momentum composite — a blended average of 1-month, 3-month, 6-month, and 12-month returns. This multi-period scoring captures both near-term shifts and longer-term trends, reducing the noise that single-lookback systems produce.
Fixed Tier Allocation
The four assets are ranked by momentum score and assigned fixed tier weights: 40% to the top-ranked, 30% to the second, 20% to the third, and 10% to the fourth. This tiered approach concentrates capital in the strongest defensive asset while maintaining diversified exposure across all four. Unlike equal-weight allocation, it rewards the asset with the clearest momentum signal.
The T-Bill Gate: When Defense Becomes Offense
Here is where the inversion becomes concrete. Each asset's momentum score is compared to the 3-month T-bill rate (DGS3MO). If a defensive asset's momentum falls below the T-bill rate — meaning it is underperforming risk-free cash — that slot's allocation shifts to US equities (SPY). The logic: if gold, bonds, commodities, or the dollar are all losing to cash, conditions likely favor risk assets.
This mechanism creates a graduated, not binary, transition. In a strong risk-on environment, all four defensive assets may fall below the T-bill threshold, and the portfolio becomes 100% SPY. In a mixed environment, some slots hold defensive assets while others hold equities. In a full risk-off environment — a flight to quality, an inflation surge, a geopolitical crisis — all four defensive assets outperform cash, and the portfolio is fully defensive with zero equity exposure.
Performance: 18 Years of Backtested Results
| Metric | Defense First | S&P 500 |
|---|---|---|
| CAGR | 10.38% | ~11.5% |
| Max Drawdown | -14.8% | -50.8% |
| Sharpe Ratio | 1.13 | ~0.65 |
| Sortino Ratio | 2.07 | — |
| Volatility | 9.14% | ~15.6% |
| Win Rate | 65.9% | — |
| Total Return | 527.07% | — |
The CAGR of 10.38% is comparable to the S&P 500, but the path to that return is fundamentally different. Defense First achieves equity-like returns with bond-like volatility (9.14%) and a maximum drawdown of -14.8% — roughly one-third of the S&P 500's worst peak-to-trough decline. The Sortino ratio of 2.07 is particularly notable: it measures return per unit of downside risk specifically, and a value above 2.0 indicates that losing months are both infrequent and shallow relative to gains.
Annual Return History
Defense First has posted positive annual returns in 16 of 19 calendar years since inception. The three negative years were modest: -2.15% in 2018, -1.68% in 2015, and -2.08% in 2012. The best year was 2025, when the strategy returned +32.1% — driven by surging gold and commodity prices during the tariff crisis and geopolitical uncertainty.
| Year | Return | Year | Return |
|---|---|---|---|
| 2008 | +7.60% | 2017 | +4.82% |
| 2009 | +7.36% | 2018 | -2.15% |
| 2010 | +11.55% | 2019 | +12.51% |
| 2011 | +12.96% | 2020 | +19.56% |
| 2012 | -2.08% | 2021 | +23.15% |
| 2013 | +16.32% | 2022 | +6.16% |
| 2014 | +8.83% | 2023 | +7.65% |
| 2015 | -1.68% | 2024 | +16.16% |
| 2016 | +7.89% | 2025 | +32.10% |
Crisis Performance: The Inverted Advantage
The defining characteristic of Defense First is its behavior during market stress. Because the strategy's default posture is defensive, it does not need to "detect" a crash and rotate out of equities — it is already positioned in the assets that benefit from uncertainty.
| Crisis | Defense First | S&P 500 |
|---|---|---|
| 2008 Financial Crisis | +7.60% | -50.8% |
| COVID Crash (Feb–Mar 2020) | +3.35% | -33.9% |
| 2022 Rate Shock | +6.16% | -18.1% |
| 2025 Tariff Shock (Mar–Apr) | +2.13% | -12.0% |
| 2026 Iran Crisis (Jan–Feb) | +12.51% | -5.0% |
The 2022 rate shock is particularly instructive. Most defensive allocation strategies that relied on bonds for protection suffered significant losses as the Federal Reserve raised rates aggressively and TLT fell roughly 30%. Defense First, however, returned +6.16% for the year. The T-bill gate recognized that TLT's momentum had collapsed below the risk-free rate and shifted that slot into SPY, while gold and commodities — which benefited from inflation — maintained strong momentum and held their defensive positions. The strategy's multi-asset defensive universe meant it was not exclusively dependent on bonds for protection.
During the 2026 Iran crisis, the strategy returned +12.51% in two months as gold surged and the dollar strengthened — both defensive assets that the strategy was already holding.
Why It Works: The Counter-Cyclical Logic
Defense First generates returns with genuinely low correlation to conventional momentum strategies. While most tactical strategies are trying to time when to exit equities, Defense First is timing when to enter them. This structural difference means it tends to perform well precisely when other strategies struggle — making it an exceptionally powerful component in multi-strategy portfolios.
The T-bill gate ensures that the strategy does not blindly hold defensive assets when they are underperforming. In strong bull markets where gold, bonds, and commodities all lag cash, the portfolio naturally rotates fully into equities. The strategy participated in the 2021 equity rally (+23.15%) and the 2024 recovery (+16.16%) because defensive asset weakness correctly signaled favorable risk conditions.
Current Allocation
As of August 2026, Defense First holds 40% in commodities (DBC), 30% in the US dollar (UUP), and 30% in US equities (SPY). TLT and GLD have fallen below the T-bill threshold — their momentum signals indicate that long-term Treasuries and gold are currently underperforming risk-free cash, so those slots have rotated to equities. This mixed positioning reflects a market environment where some defensive assets (commodities, dollar) still show strength while others do not.
When Defense First Struggles
The strategy's inverted logic creates a specific vulnerability: prolonged periods where all defensive assets underperform simultaneously while equities rise modestly. In this scenario, the portfolio rotates fully into SPY but lacks the concentration that dedicated equity momentum strategies achieve. The worst year (-2.15% in 2018) occurred when defensive assets oscillated around the T-bill threshold, generating whipsaw signals that eroded returns through frequent rotation.
The strategy also lags during powerful equity rallies where a simple buy-and-hold approach would outperform. In 2013, Defense First returned +16.32% — strong by most standards, but below the S&P 500's +32.4%. The defensive-first posture inherently limits upside capture in exchange for its drawdown protection.
Defense First in Multi-Strategy Portfolios
Defense First's primary value is not as a standalone strategy but as a diversifying component within a blended portfolio. Its near-zero correlation (typically 0.18–0.33) with conventional momentum strategies means that combining it with canary-based approaches like BAA or trend-following systems produces a blended equity curve significantly smoother than either component alone.
Several PortfolioWiser meta portfolios use Defense First as a core component for this reason. In a three- or four-strategy blend, it provides returns during the exact periods when momentum strategies are losing money, compressing overall portfolio drawdowns while maintaining strong risk-adjusted performance.
How to Explore This on PortfolioWiser
Defense First is available in the strategy library with full backtest data, monthly allocation history, and trade records. You can modify its parameters — momentum method, lookback period, tier weights, or ETF universe — in the Scenario Builder to see how each change affects performance. To explore how it pairs with other strategies in a blended portfolio, use the Portfolio Blender to add it alongside complementary approaches and view the combined result.
Key Takeaways
Defense First inverts the conventional allocation framework by treating gold, bonds, commodities, and the dollar as primary holdings rather than fallbacks. Its T-bill gate creates a graduated mechanism that adds equity exposure only when defensive assets signal favorable conditions. The result over 18 years: a 10.38% CAGR with -14.8% maximum drawdown, positive returns through every major crisis, and correlation low enough to meaningfully reduce risk when combined with other tactical approaches. The strategy is not designed for maximum returns — it is designed to deliver equity-like growth while spending most of its time in the assets that protect capital when markets break down.