Strategic Allocation

A subscriber requested evaluation of a streamlined version of the Simple Asset Class ETF Momentum Strategy (SACEMS) that considers only three exchange-traded funds (ETF):

• SPDR S&P 500 (SPY)
• iShares Barclays 20+ Year Treasury Bond (TLT)
• iShares iBoxx $ Investment Grade Corporate Bond (LQD)

To evaluate, we test a strategy that each month picks the one of these ETFs with the highest total return over a set momentum ranking (lookback) interval. We call the strategy Very Simple SACEMS (VSACEMS) Top 1. We consider lookback intervals of one to 12 months. We then select one of these lookback intervals and generate performance statistics similar to those for SACEMS. We consider three benchmarks:

1. SPY – buy and hold SPY.
2. SPY:SMA10 Cash – Hold SPY (3-month U.S. Treasury bills) when SPY is above (below) its 10-month simple moving average (SMA10) at the end of the prior month.
3. SPY:SMA10 TLT – Hold SPY (TLT) when SPY is above (below) its SMA10 at the end of the prior month.

Using monthly dividend-adjusted prices for the above three assets during July 2002 (limited by TLT and LQD) through May 2023, we find that: Keep Reading

Which alternative risk premiums (ARP) protect against stock and bond market crashes via return correlations/betas that remain low during such events? In their May 2023 paper entitled “Does Alternative Risk Premia Diversify? New Evidence for the Post-Pandemic Era”, Antti Suhonen and Kari Vatanen employ recent data to re-examine ARP risk and diversification properties, focusing on drawdown intervals for stocks and bonds. They categorize ARP strategies as offensive (risk-on) or defensive (risk-off) based on respective equity market interactions. For robustness, they consider several drawdown metrics. Using weekly data for 27 “pure” factors spanning five asset classes (commodity, credit, equity, fixed income and currency exchange) and 10 ARP strategies (backwardation, carry, congestion, low volatility, momentum, quality, size, trend, value and volatility) from PremiaLab during January 2007 through mid-October 2022, they find that:

Keep Reading

In his 2023 book, The Uncertainty Solution: How to Invest with Confidence in the Face of the Unknown, author John Jennings seeks “to provide individual investors with mental models that will help them make better investment decisions, practice better investment behavior, and be better consumers of investment advice… This book is not about how to invest but rather how to think about investing. It is the culmination of my thirteen-year quest for investment wisdom… The mental models in this book describe the investment world as full of uncertainty, wild randomness, unpredictability, and pitfalls. There’s no easy path. But mental models that embrace reality—that take the world as it is, not how we think it is or want it to be—will make you a better investor and a better consumer of investment advice.” Based on his many years of wealth management experience, especially during the 2007-2008 Financial Crisis, he concludes that:

Keep Reading

A subscriber asked about the performance of the 50-50  Simple Asset Class ETF Value Strategy (SACEVS) Best Value-Simple Asset Class ETF Momentum Strategy (SACEMS) Equal-Weighted (EW) Top 2 in combination with “Sell in May”. To investigate, we compare three alternatives:

1. Best Value – EW Top 2 – holds 50-50 SACEVS Best Value-SACEMS EW Top 2 during all months.
2. “Sell in May” – holds 50-50 SACEVS Best Value-SACEMS EW Top 2 during November through April and 3-month U.S. Treasury bills (T-bills) during May through October.
3. “Opposite” – holds 50-50 SACEVS Best Value-SACEMS EW Top 2 during May through October and 3-month U.S. Treasury bills (T-bills) during November through April.

Using monthly returns for SACEVS Best Value and SACEMS EW Top 2 and monthly T-bill yield during July 2006 (limited by SACEMS) through April 2023, we find that: Keep Reading

A subscriber asked for an update of the performance comparison between 50% Simple Asset Class ETF Value Strategy (SACEVS) Best Value-50% Simple Asset Class ETF Momentum Strategy (SACEMS) equal-weighted top two (EW Top 2), rebalanced monthly (SACEVS-SACEMS 50-50), and a strategy that is each week in stocks or bonds according to whether the return on lumber is greater than the return on gold over the past 13 weeks (L-G Strategy). To test the latter strategy we use the following exchanged-traded fund (ETF) proxies:

• SPDR S&P 500 (SPY) for stocks.
• iShares 20+ Year Treasury Bond (TLT) for bonds.
• Invesco MSCI Global Timber (CUT) for lumber.
• SPDR Gold Shares (GLD) for gold.

Using weekly dividend-adjusted prices for SPY, TLT, CUT and GLD during early February 2008 (limited by inception of CUT) through April 2023 and roughly matched start and stop performance for monthly SACEVS-SACEMS 50-50 , we find that:

Keep Reading

Is equal weighting of portfolio assets easy or hard to beat within or across asset classes? In their April 2023 paper entitled “Is Naïve Asset Allocation Always Preferable?”, Thomas Conlon, John Cotter, Iason Kynigakis and Enrique Salvador employ simulations to pit equal portfolio weighting against 19 other weighting strategies (fixed strategic weights, nine variations of dynamic mean-variance optimization and nine variations of dynamic minimum variance) within or across four asset classes (stocks, bonds, commodities and real estate). They reform portfolios monthly and focus on excess returns relative to the 3-month U.S. Treasury bill yield. They consider both conventional risk-adjusted returns (Sharpe ratio) and tail risk (Value-at-Risk, or VaR). They include portfolio reformation costs of 0.5% of turnover value. Using monthly returns for various indexes as asset class proxies and monthly 3-month U.S. Treasury bill yields during January 1990 through December 2019, they find that:

Keep Reading

Can investors improve long-term retirement portfolio outcomes by targeting equity factor premiums in their stock allocations? In his April 2023 paper entitled “How Targeting the Size, Value, and Profitability Premiums Can Improve Retirement Outcomes”, Mathieu Pellerin investigates whether stock portfolios that target size, value and profitability factor premiums better sustain retirement spending and generate larger bequests than those holding the broad stock market. His hypothetical investor:

• Starts saving at 25, retires at 65 and dies at 95.
• Initially allocates 100% to stocks, at age 45 reduces this allocation linearly to 50% at age 65 by shifting to bonds, and thereafter maintains 50%/50% stocks/bonds.
• Makes $1,042 monthly contributions ($12,500 per year, or $500,000 from age 25 to 65).
• After retirement, withdraws (consumes) a constant annual 4% in real terms of the balance at retirement.
• For the stock allocation, chooses either a broad value-weighted market index (CRSP 1-10) or the Dimensional US Adjusted Market 1 index that emphasizes size, value and profitability factors with low turnover.
• Earns real annual broad stock market returns of either 8.1% (actual historical average) or 5.0% (a conservative 5th percentile of historical return distribution).
• For the bond allocation, holds 5-year U.S. Treasury notes.

He simulates 100,000 lifecycles by, for each lifecycle: (1) extracting 70-year (840-month) real asset class return subsamples from the full histories; and, (2) applying block bootstrapping with 10-year mean block size to generate lifecycle portfolio returns. Using monthly historical returns for the specified stock/bond proxies and monthly U.S. inflation data during June 1927 through December 2022, he finds that:

Keep Reading

A subscriber asked about the performance of a variation of the monthly reformed 50-50  Simple Asset Class ETF Value Strategy (SACEVS) Best Value-Simple Asset Class ETF Momentum Strategy (SACEMS) Equal-Weighted (EW) Top 2 combination that substitutes 100% SACEMS EW Top 2 whenever both:

1. SPDR S&P 500 ETF Trust (SPY) is the selection for SACEVS Best Value at the end of the prior month.
2. SPY is below its 10-month simple moving average at the end of the prior month.

The objective of the variation is to suppress SACEVS Best Value drawdowns. To investigate, we compare performance results for this variation (“Filtered”) with those for baseline 50-50 SACEVS Best Value-SACEMS EW Top 2. Using monthly returns for SACEVS Best Value and SACEMS EW Top 2 since July 2006 (limited by SACEMS) and monthly dividend-adjusted prices for SPY since September 2005, all through March 2023, we find that: Keep Reading

A subscriber asked whether the Simple Asset Class ETF Momentum Strategy (SACEMS) exhibits monthly calendar effects. In investigating, we also look at the Simple Asset Class ETF Value Strategy (SACEVS)? We consider the Best Value (most undervalued asset) and Weighted (assets weighted by degree of undervaluation) versions of SACEVS. We consider the Top 1, equal-weighted (EW) Top 2 and EW Top 3 versions of SACEMS, which each month holds the top one, two or three of nine ETFs/cash with the highest total returns over a specified lookback interval. We further compare seasonalities of these strategies to those of their benchmarks: for SACEVS, a monthly rebalanced 60% stocks-40% bonds portfolio (60-40); and, for SACEMS an equal-weighted and monthly rebalanced portfolio of the SACEMS universe (EW All). Using monthly gross total returns for SACEVS since August 2002 and for SACEMS since July 2006, both through March 2023, we find that:

Keep Reading

Does an allocation to gold truly protect a portfolio from downside risk? In their April 2023 paper entitled “The Golden Rule of Investing”, Pim van Vliet and Harald Lohre examine downside risks for portfolios of stocks (value-weighted U.S. stock market) and bonds (10-year U.S. Treasury notes) with and without gold (bullion) based on real returns and a 1-year investment horizon. They also investigate substitution of low-volatility stocks for the broad stock market in search of further downside risk protection. Using monthly returns for the specified assets and U.S. inflation data during 1975 (when gold becomes truly tradable) through 2022, they find that:

Keep Reading