TAA Model for January, 2011
This is a new monthly feature at the MarketSci Blog.
Our Tactical Asset Allocation (TAA) model selects up to four assets from a diversified basket of asset classes on the final trading day of each month. Below is our allocation for today’s close. Click to read more about the TAA model.
I eat my own cooking, so I’ve devoted a healthy share of my own net worth to the TAA model (read why). On the last day of each month I share my new allocation (see above) and real-time performance (see below), excluding trading frictions and taxes.
The model performed in line with the benchmark in December, returning +1.2% (versus +1.4%) as of yesterday, 12/30. Three out of four positions will be replaced at today’s close. Note that U.S. small-cap stocks (IWM) will replace large-caps (SPY) as a result of the seasonality bias discussed here.
As the performance graph below shows, the model has (so far) been a near mirror image of the benchmark. That’s because the portfolio has looked so similar to the benchmark, with 36% invested in Treasuries and 39% in stocks/real estate.
For better or worse, that will not be the case beginning in January as we drop Treasuries from the portfolio in favor of commodities.
[linearly-scaled, growth of $10,000]
Happy Trading,
ms
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Filed under: Tactical Asset Allocation | 22 Comments
Hello Mike,
How many ETFs did you include in your basket of asset classes?
Hello Blink – right now: Japan equities, China equities, gold, commodities, 10-year US Treasuries, U.S. large & small caps, and real estate. michael
Do you look primarily for non-correlated assets? How about emerging markets and currency markets?
Hello Blink – I chose asset classes that are (a) broad, (b) can be viewed (at least loosely) as “stores of wealth”, and (c) have lower correlation w/ other asset classes in the basket.
I excluded currencies because they are not stores of wealth. And I excluded emerging markets indices because of the high correlation to US indices (I instead use the top 3 global economies based on GDP at that moment in time). michael
Mike, what happens if you combine TAA strategy and 10% stoploss order for each ETF? Is it better or worse?
Hello Blink – would need to test it, but I’m intentionally staying away from intramonth trading – I want this model to be as easy to execute as possible. michael
Hi Michael,
I’m following your taa recommendations because I fear I don’t have the skills to do it myself.
I had hoped to follow the Faber model using the 5 global assets, buying the top 3( above their 10 month sma), and getting 15% with a 12.95% maxdd. But I gather just comparing them to each other on a 12 month chart doesn’t cut it, even if I factor in dividends.
Is there any simple method that would do ok? (this is all in case you get hit by a bus).
Also do you use the wait a month thing in your calculations?
Love your blog.
Larry
Hello Larry – a couple of thoughts:
(1) Backtests are just historical guides that are implicitly curve-fitted, so it makes me very afraid when someone says they expect to get X return and X drawdown. Those numbers are unknowable (and I’m not even sure where they came from). More: http://marketsci.wordpress.com/2010/08/06/listen-up-backtesting-is-not-real-time/
(2) Faber lays out a very simple model to follow both in his paper and his book that could be done just eyeballing a chart.
Just my $0.02…michael
Larry,
You may want to try ETFReplay.com
You can set up a variety of ETF portfolios and backtest them and apply your own parameters
Michael
why do you choose GSG above DBC?
Regards
RE to Kim: good question. Even though GSG is grossly overweighted in petrol-based commodities, I like that its allocation is based on some objective measure (the total amount of each contract traded) rather than an off-the-cuff allocation like DBC. michael
Most ETF are valued in $. Is there an “easy way” to hedge against the $ risk if your wealth is expressed in another currency?
Kim,
I do it with FX and rebalance monthly. I go long EURUSD (buy EUR, sell USD) and sell the same amount of USD as ETF portfolio is worth at that time. Hope it helps.
Michael,
I know your perference is not to day trade, but I’m wondering if there happen to be any reliable mechanical strategies that that involve trading only during the day and not holding any positions over night? ….or, are all mechanical day trading strategies bound to fail over the long haul? If it is the latter, then does that mean NOBODY could ever succeed at daytrading over the long haul or, or are there some day traders that are “gifted” enough with the right kind of intuition that makes them successful as day traders? Is this something that could be learned or is it something that can’t be learned due to the the market being too darned noisy in the intraday time frame? Thanks. Jay
Hello Jay – I think it’s a great question, but not one that I’m qualified to answer.
My reasoning for not daytrading has nothing to do with efficacy. It has to do with already being able to meet my financial goals without being tied to a monitor all day (more: http://marketsci.wordpress.com/2009/11/19/wasting-a-good-life-trading/).
I definitely think folks can trade in an intraday timeframe successfully, but it’s not something I would subject myself to. michael
Michael,
Do you have historical year-by-year and month-by-month performance data for this strategy? Did you already post it? I may have missed it.
Thanks.
Since its start Faber’s GTAA has underperformed the S&P. (See here.) Any thoughts about why?
Hello Russ – it’s expected – GTAA (like the model above) is a diversified model and the S&P 500 has been on a tear – a diversified model is always going to underperform a particular asset class that’s performing strongly. michael