Today I’ll cover a few other extensions to the IVY timing model beyond those I covered in my last post. The source of these extensions is the same, Mebane Faber’s IVY update outlining these approaches. The extensions I’ll cover are varying the weighting of the asset class mix and taking advantage of momentum in the asset classes to increase performance. Lets jump right in.
The first extension is to change the asset class weighting of the GTAA 13 portfolio covered in the last post to include more bonds (40% vs the 20% in GTAA 13) and change the default cash investment from t-bills to 10 yr govt bonds. This portfolio is called GTAA Conservative and now the original GTAA 13 allocation is called GTAA Moderate. The GTAA Conservative allocation is below.
I’ll cover the performance results of all these extensions together in a bit but lets cover the last extensions first. The last extensions use the recent performance (momentum) of the GTAA Moderate asset classes to vary the weighting of the asset classes. The original background paper outlining the basics of these momentum strategies can be found here. This extension takes GTAA 13 moderate asset classes and ranks then by the average of the return over the last 1, 3, 6, and 12 months. Then an equal weighted portfolio of the top 6 ranked asset classes is formed. Also, the asset classes are only included if they are above their 200-day SMA. Otherwise, that portion of the portfolio stays in cash. This is called the GTAA Aggressive Top 6. Also, an even more aggressive portfolio is formed with the top 3 asset classes. This is called GTAA Aggressive Top 3. OK. Now lets take all these extensions of the IVY timing model and see how they perform. See table below.
As a reference point, the GTAA 13 MOD portfolio in the table above is the same portfolio as the GTAA 13 portfolio in the table in my previous post. The conservative portfolio is not much different than the moderate portfolio and doesn’t seem to offer any advantages over the GTAA 13 MOD portfolio. The aggressive portfolios that take advantage of momentum have markedly higher performance, 5% to 7% extra returns per year. The downside is higher volatility and about double the drawdown of the GTAA 13 MOD. Also, the downside is the increased difficulty in implementing these portfolios by keeping track of the all the signals.
In short, the aggressive extensions to the already extended 13 asset class version of the basic IVY timing model offer increased performance but with higher drawdowns. And also with increased complexity. But, hey, for 5% to 7% a year over the already great GTAA 13 MOD portfolio which already offers 1.56% more per year than the original IVY Timing (GTAA 5) portfolio it may be well worth the effort for some. My only caution would be to really think about if you can handle the larger drawdowns. From my experience most investors can’t. They say they can, particularly during rising markets, but when the rubber hits the road they run for the hills and abandon their investment approach.
Full Disclaimer - Nothing on this site should ever be considered advice, research or the invitation to buy or sell securities. These are my personal opinions only.