TAA Model for September, 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 outperformed its benchmark in August, returning (as of yesterday’s close) +1.1% vs -0.4%. More importantly, the model weathered the storm in equities well, mainly as a result of the defensive position in gold.

For the upcoming month of September, the model is making 6 total trades (the most since real-time trading began), replacing U.S. and Japan stocks with real estate and commodities, and adjusting the size of the 10-year Treasury and gold positions.

There hasn’t been a significant difference in performance between the model and the benchmark in the 11 months since inception (see below). As I’ve discussed before, I think the real strength of TAA becomes obvious when equities and related asset classes go through a protracted downturn. Until then, I’m happy to keep pace with the benchmark, given how diversified our holdings are.

This month I’ve added a few simple summary statistics (see below).

I’ve also included alternative benchmarks, including Cambria’s GTAA. GTAA is the most conceptually-similar investment available to the MarketSci TAA model. It’s important to note that despite outperforming GTAA since inception, it’s way too early to compare the efficacy of either program. Remember, these are generational (and not short-term) strategies.

Happy Trading,

. . . . .

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8 Responses to “TAA Model for September, 2011”

  1. 1 Jay

    I’m not really understanding the addition of a new VNQ position from a technical standpoint. On the Monthly chart, it closed below the 10 month SMA which is bearish. Granted, a certain weekly crossover I like to look at hasn’t gotten bearish for VNQ, even though it did get bearish for SPY. If I were already long VNQ, I probably would be taking some off the table due to the close below the 10 month SMA, but keeping some on due to my favorite weekly crossover not being bearish yet. However, I’m not really understanding why this would be the time to be initiating a NEW position in VNQ rather.

    • 2 MarketSci

      RE to Jay: the short answer is that I’m looking at any entirely different set of criteria for selecting an asset class. This isn’t the “is VNQ a buy?” strategy. This is TAA, meaning I have to consider how the asset class fits in the larger portfolio.

      Side note: I’ve never understood this idea of changing your view on an asset depending on whether you are already holding it. The market doesn’t care whether you’re already holding VNQ or not. Assuming that you’re not trading such a small portfolio that transaction costs are a factor, why would your own view of that asset change? Just my $0.02.


  2. Hi Michael, what do you think about also comparing your TAA portfolio to PRPFX or the 4×25 permanent portfolio in addition to GTAA?

    • 4 MarketSci

      RE to Heather: let me clarify my response. I’m not saying that either is the better strategy. I don’t have a strong opinion on that. I am saying that PRPFX is a better benchmark because it’s straightforward. There’s no wiggle room as to how’s it’s calculated and it’s something investors can easily access the data for and invest in as-is.

      And yes, I would encourage investors to compare TAA to the Permanent Portfolio. The Perm Port is going to be successful in very specific types of markets (like this one) and very much unsuccessful in others. TAA is going to underperform the Perm Port when it’s the Perm Port’s market, just like it’s going to underperform the equity market when it’s its time to shine.

      The difference is that the Perm Port (just like a B&H investment in equities) doesn’t have the ability to shift when the market changes. Just my $0.02. More on this in next month’s report when I begin including the Perm Port as a benchmark. michael

    • 5 MarketSci

      Hello Matthew – I think PRPFX would be appropriate. Is the 4×25 perm port where you rebalance periodically between 4 asset classes? If so, I think PRPFX is probably the better choice. Straight-forward and easy for investors to access. Look for that in next month’s report. michael

      • 6 Heather

        You are correct in that PRPFX is easy to access to investors however does not adhere to Harry Browne’s true 4 x 25 Permanent Portfolio consisting of equal parts gold (GLD or IAU), short term treasuries (SHY), long term treasuries (TLT) and stock (VTI). Rebalance bands are 15 and 35 percent so one’s after tax returns are excellent as well. I would strongly suggest anyone compare your strategy to this one. Heather

  3. 7 Markus

    Pretty interesting TAA approach, however don’t you think that the very high allocation to treasuries is a problem due to the already super low yields. I dont think that historical risk return numbers are a good benchmark for the current environment.

    • 8 MarketSci

      Hello Markus – I’ve (literally) been hearing this argument since I launched the model and yet Treasuries continue to perform. When they no longer perform the model won’t select them. In the meantime, I see no reason to preemptively take them off the plate, especially given the lack of major asset classes with low correlation to equities in today’s market. michael

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