TAA Model for November, 2012

31Oct12

This is a monthly feature at the MarketSci Blog.

Our Tactical Asset Allocation (TAA) model selects up to four assets from a diverse 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 the most recent close on 10/26) -1.8% versus -1.3%.

For November, the model will be selling real estate (VNQ) and replacing it with the FTSE/Xinhua China 25 stock index (FXI). The position is relatively small to compensate for the high volatility of China stocks.

Since inception, the model has stacked up well against similar active strategies like Cambria’s ETF GTAA and the Permanent Portfolio (PRPFX), but has lagged what I think is the most important benchmark, a passive investment in equities and Treasuries rebalanced monthly (see stats below).

As I’ve discussed before, the model would historically have gone through extended periods of underperforming its benchmark, especially when the benchmark has been strong (as it has been over the last couple of years). This is a “generational” model and I’m much more concerned with returns over the next decades than any one month or year (read more).

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Happy Trading,
ms

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6 Responses to “TAA Model for November, 2012”

  1. 1 steve

    so I know this is a generational model but at what point do you say “hey, maybe something is amiss” if it continues to underperform? always the tough question to answer. seems like since these TAA models became popular, they’ve all performed poorly. I should think you’ve got data that helps to answer that question.

    • 2 MarketSci

      Hello Steve – that’s a great question, but (empirically) we’re not close to that point. The model has underperformed the benchmark over the last 14 months, but as I showed in the post below, the model would have gone through many similar periods of underperformance.

      http://marketsci.wordpress.com/2010/10/25/long-backtests-and-madoff%E2%80%99esque-returns/

      Cutting through all the fancy additions to the model, it (like most other TAA models) is really multi-asset trend-following. Trend-following has a long history of working well over the long run, but often failing badly in the short run. Nature of the beast.

      What is much more interesting to talk about is how all these models adjust to a future where fixed income fails to deliver.

      michael

      • 3 Jon

        And I’m hoping you’re going to do a post that provides your thoughts and approach to dealing with likely sub-normal bond returns over the next 10 to 30 years in the context of a TAA model…?

        Good to see you posting frequently again.

        -Jon

  2. 4 Steve

    You may want to review some of your boilerplate text used each month. You show your annual performance as 3.1% and the Permanent Portfolio’s as 7.7%. Yet you say your TAA has “stacked up well” against it. Time to change that sentence?

  3. Is the permanent portfolio a rules based trend following fund? Not familiar with it. Thx

    • 6 MarketSci

      Hello Tom – the Permanent Portfolio isn’t actually TAA – it’s a static mix of assets. I would suggest a google search for more info. I included it b/c it was getting a lot of press when I first started tracking this strategy b/c it has done well in recent years. michael


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