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Combining an All Weather Portfolio, Crash Protection and Unemployment Trend

| | Posted in: Strategic Allocation

Is it possible to achieve an attractive return with very low risk from a small universe of exchange-traded funds (ETF)? In the January 2021 revision of his paper entitled "Lazy Momentum with Growth-Trend Timing: Resilient Asset Allocation (RAA)", Wouter Keller constructs and tests the Resilient Asset Allocation (RAA) strategy as a more aggressive version of the Lethargic Asset Allocation (LAA) strategy. LAA switches between risky (equal-weighted  QQQ, IWD, IEF and GLD) and defensive (equal-weighted IWD, GLD, SHY and IEF) portfolios based on trend in the U.S. unemployment rate (bullish when above and bearish when below its 12-month simple moving average). RAA alters LAA in three ways:

  1. Changes the risky portfolio to an All Weather-like portfolio, with five equal-weighted assets (QQQ, IWN, IEF, TLT, GLD) instead of four and only two equal-weighted assets (IEF and TLT) as a risk-off portfolio.
  2. Adds "canary" crash protection from the Defensive Asset Allocation strategy for signaling the market trend with a fast filter (bearish when either or both of VWO or BND turn bad).
  3. Slows the unemployment rate trend signal, simply comparing recent unemployment rate with that of a year ago.

RAA is in the defensive portfolio only when both the canary and unemployment rate trend signals are bearish. Using a combination of modeled and (as available) actual monthly price data for the specified ETFs during December 1970 through November 2020, he finds that:

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