TAA Model for November, 2011
This is a 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 the new 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).
The model underperformed its benchmark in October, returning (as of yesterday’s close) +0.2% vs +5.5%.
The model was positioned very defensively in October. Given how epicly equity-related asset classes rallied for the month, eking out any gain was fortunate. With Treasuries up today, the portfolio should end the month with a respectable gain.
For the upcoming month the model is dropping the large Treasuries position in favor of a small position in real estate (16%) and a large cash position (59%). This is, like last month, a very defensive allocation.
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Note that last month I began including the Permanent Portfolio mutual fund PRPFX as an alternative benchmark (see below). Click to read more about PRPFX.
PRPFX has performed well over the last decade (and poorly prior to that) as a result of its large allocation to defensive assets like gold and Treasuries and relatively small allocation to risk assets like equities.
My $0.02 is that PRPFX is a very good portfolio built for a very specific type of market (namely one with a high degree of uncertainty like we’re in now) but that given enough time, TAA wins the day.
Risk comes in and out of favor and PRPFX doesn’t have the ability to adjust to that (which is why performance was so poor in the 1990′s). But for now, in this specific market, PRPFX is a tough benchmark to beat.
Happy Trading,
ms
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Filed under: Tactical Asset Allocation | 5 Comments
Hi Mike.
How do you compute for the Sharpe ratio?
Thanks.
Hello – let me know if any of this doesn’t make sense:
[(annualized return - risk free rate) / annualized std. dev.]
I’ve calculated the ann. return and SD based on daily returns because of how little data is available.
Annualized return = geometric average of daily returns raised to the power of 252.
Annualized SD = SD of daily returns multiplied by the square root of 252.
I’ve assumed a risk free rate = the nearest 13-week UST.
michael
Hi Michael. Makes perfect sense. I was just wondering what you used as the risk-free rate.
Thanks and cheers!
Hi Michael,
Thanks for all your interesting work.
Just curious about this month’s switch – why the total closeout of IEF, given it’s still above its 200 day moving average?
Thank you,
Matt