Tactical asset allocation – march 2015 update

28 Comments

Bryce · February 28, 2015 at 10:35 am

Paul,
Just FYI, your symbols for VWO, VCIT, VGIT and VEA are not lining up with your formulas.

Bryce

paul.novell@gmail.com · February 28, 2015 at 2:07 pm
That was weird. Fixed. Thanks.
Paul

Curious George · February 28, 2015 at 4:39 pm

“Back in the day” Brokers calculated and charted 200 day (daily) moving averages with paper and wood pencils. Have you ever run a back-test analysis of a 100% stock portfolio (whole market like VTI or large cap SPY) using 200 day buy/sell signals?
Would be interesting to contrast IVY 5 vs All stock using the same month end (and/or daily) timing signals.
Seems IVY has embedded Bond and Gold tailwinds that are unlikely to replicate.

paul.novell@gmail.com · March 1, 2015 at 3:42 pm
Yep, I used to be one of those with the paper and pencil ‘back in the day’.
Yes, I have and more importantly the creator of the strategy (Meb Faber) and many others have tested different moving averages. Faber discusses his and others work in his paper.
Paul

Bill · March 1, 2015 at 12:05 pm

Hi Paul;
Thank you for your work both here and on Twitter.
After many years, I’ve fully realized that I’m my worst enemy when trying to implement my financial plan. After reading your blog for a while(as well as Menane’s work), I am going to gradually implement the GTAA13 plan and work very hard to keep my hands off it until the next months signal.
One quick question: I think you’ve answered this before, I just couldn’t find it. Do I wait for a new signal before entering an asset class, or enter the invested positions at the beginning of the month?
Thanks again for all your work.
Bill

paul.novell@gmail.com · March 1, 2015 at 3:45 pm
Thanks Bill. The recommendation is to enter the invested positions at the end of the month. You can also average into the full dollar amount over a period of months. Meb Faber answers that question in his FAQ at the bottom of his timing model update page.
Paul

Mike · March 1, 2015 at 2:27 pm

Paul,

I have a question about your calculation of average return in the GTAA13 spreadsheet. This average is clearly important because it is what you use to stack rank the investments each month, end and make investment changes accordingly. I understand that averaging across 1 month, 3 months, 6 months and 12 months gives you the average return using different snapshots of time. Why don’t you also include 9 months to give a true cumulative quarter return (1Q, 2Q, 3Q and 4Q) in the average? With each time unit being given equal weights — 1 month return is given as much importance as 12 month return in the “equal weighting” average — is this over weighting 1 month? I understand that what just happened in the given month is very important, but doesn’t this unfairly skew the average? Hope my question makes sense, just trying to understand what this average really is telling us,

As always appreciate your work and responses.

Thanks!
Mike

paul.novell@gmail.com · March 1, 2015 at 3:47 pm
Hey Mike, brain dead simple answer is because that’s what Faber did on his strategy paper. Better answer is that having the 9 month return in there added no more information to the strategy. I’ve seen Meb address this before but can’t find a reference right now in a cursory look back.
Paul

Kirk Doughty · March 2, 2015 at 4:49 pm

Hi Paul,

I am a new disciple of the IVY 13 AGG3 timing strategy. I’m just now devoting a portion of my Vanguard holdings to it. I like to use Vanguard ETFs as much as possible (no commission) and I don’t like MTUM ask/bid spread. Can you recommend a Vanguard ETF that acts like a proxy for MTUM?

I really appreciate your blog.
Kirk

paul.novell@gmail.com · March 3, 2015 at 7:08 am
Hey Kirk, Vanguard does not offer any momentum style ETFs so there is no MTUM replacement from them. The best alternatives I have found are IUSG and PDP. Also, the spread on MTUM is about the same as many Vanguard ETFs, e.g. VBK and VGLT. With appropriate use of limit orders it is not that big a deal IMO.
Paul

Pat · March 3, 2015 at 5:21 am

Paul,

Thanks to your your reommendations on this blog I have read both the Ivy Portfolio and What Works on Wall Street. I am in all stocks now. The combination of the AAG3 and Utilities stategies seems to be a good combination of diversification, return and low draw down. Now I need to determine how much to commit to each. Any thoughts you have would be welcomed.

Thanks

paul.novell@gmail.com · March 3, 2015 at 7:10 am
Hi Pat, tough question to answer without knowing a lot more about you and your situation. What I can say is like to diversify my strategies and not put more than 33% of my portfolio in any one strategy. AGG3 has risk management built right in so I think is appropriate for a large chunk. The Utilities strategy has a lot higher drawdowns and no risk management so no appropriate for a large chunk unless your risk tolerance is quite high.
Paul

Pat · March 3, 2015 at 4:01 pm
Thanks for your response Paul. That is kind of what I was thinking. The one thing that I am curious about is how did you go about selecting the ETF’s in your GTAA13?
Pat

paul.novell@gmail.com · March 4, 2015 at 10:07 am
Pretty simple. Look for Vanguard ETFs that match each asset class first because they are usually the cheapest. Then go from there….

Pat lee · March 14, 2015 at 8:32 pm

Thanks. Your blog is very informative! I am new to Tactical Asset Allocation and want to apply TAA to permanent portfolio. However, I know from Harry Browne’s book that the 15%/35% rebalance bands will trigger the rebalancing. Does this rebalance bands still apply for Permanent Portfolio in TAA.
If rebalance band (15%/35%) apply, then if one of the asset classes below 10 Moving Average and being moved to cash, it will always hit the 15%/35% triggers and triggers rebalancing as well.
Is my understanding correct?
Thank you

paul.novell@gmail.com · March 15, 2015 at 1:56 pm
Pat, the rebalance bands would still apply when applying TAA to the Permanent Portfolio. But no, with TAA the rebalance bands will not always trigger if a portion of the portfolio moves to cash. Each amount in each portion of the portfolio (VTI, VGLT, SHY, IAU) gets treated as an asset bucket whether it happens to be invested or in cash that month. It is only when the ‘buckets’ are beyond the threshold bands that rebalancing would apply. For example, IAU, went to cash at the end of last month, so maybe at the end of the month the portfolio was 26% VTI, 27% TLT, 25% SHY, 22% Cash. No rebalancing would take place – simple the 22% that was in IAU at the end of the month went directly to cash.
Paul

Pat lee · March 18, 2015 at 7:56 pm
Thanks for the clear explanation. Therefore, in your example, cash will then be treated as an asset bucket replacing IAU bucket for the purpose of calculating when to do the rebalancing. Is my understanding correct?
Sorry to further trouble you. What if more than one buckets needed to be moved to cash. For example, both IAU and VTI go below 10 Moving Average and then both go to cash. In such case, only three asset buckets remaining (i.e. VGLT, SHY and cash). Then, how to calculate the rebalancing bands?

paul.novell@gmail.com · March 21, 2015 at 9:55 am
Pat, the rebalancing bands apply to each bucket as before. If the VTI/Cash bucket grows to over 35% then you rebalance that bucket. Similarly for the other buckets.
Paul

Mike · March 15, 2015 at 4:37 am

Hi Paul!

Thanks for your blog, great stuff. If I were to begin investing the GTAA AGG3 style, would I be invested now to VNQ (20%), MTUM (5%) and VGLT (5%)? 70% cash?

And AGG6 would add VTV, VBR and VBK 5% each? 55% cash?

paul.novell@gmail.com · March 15, 2015 at 2:05 pm
Mike, the AGG3 and AGG6 are equal weight portfolios. All the assets held in the portfolio are weighted in equal percentages. The AGG3 portfolio assets are 33.33% each, and the AGG6 portfolios are 16.67% each.
Paul

Damian · March 15, 2015 at 6:39 pm
Paul, I’m new here and haven’t been able to find this while looking around — is your implementation / interpretation of GTAA (e.g., with AGG 3) based on something Faber himself constructed, or is it just making use of the principles he described here (http://mebfaber.com/2009/06/25/combining-rotation-and-timing-systems/) as extensions to his original QTAA paper? In other words, has he espoused using the MTUM ETF? Where did you get the 13 asset classes, and why are you using MTUM? (Perhaps a nod to Antonacci’s work?)

paul.novell@gmail.com · March 16, 2015 at 10:15 am
Damian, the asset classes come from Meb’s paper linked to right at the top of his timing model page. That paper is the reference for all the IVY models I discuss in the blog. The asset classes for the AGG models are listed right on page 43 of the paper. The asset class meant to be tracked by MTUM is US large cap momentum. Meb does not really espouse any particular ETFs. MTUM is what I and others (blog readers, etc..) thought best represented the asset class. Other choices are PDP and IUSG. Sometimes there are no great ETFs to track a particular asset class so we make do with what is available. For example, we use VBK to represent small cap momentum when that ETF is really a growth ETF which is not really representative of the asset class. But it’s the best choice out there for now.
Paul

Tom · March 17, 2015 at 4:18 pm

Hi Paul,

Thanks for the outstanding overview of market-beating investments. I’m new to this but find your recommendations extremely helpful. I’m a little overwhelmed though, and wonder if you can distill the advice…

There seem to be 8 Quantitative Portfolios mentioned, along with 3 Trending (AGG 3/6/13), Permanent Portfolio, Timing version of Permanent Portfolio, IVY Timing, IVY buy and hold, GTAA13 buy and hold, and finally 100% cash.

Bottom line, which of these 17 investment options should I put my money in Today?
Thank-you warmly for your advice.

paul.novell@gmail.com · March 21, 2015 at 9:52 am
Tom, Sorry I can’t answer that question. It depends on so many personal factors. I can say this; the most conservative options are the Permanent Portfolios and the tactical asset allocation portfolios. The quant portfolios are equity only portfolios and are quite aggressive. Personally, I never pick just one portfolio but am invested across several.
Paul

jim basu · March 17, 2015 at 6:14 pm

I am a noob here and i am yet to retire (age 47)
I would like to try out this strategy (GTAA13) on my Vanguard IRA (pretax acct)
I currently do a 60/40 buy and hold.
I am not sure how do go for position CASH….meaning when i sell the asset (example VEA) in Pauls spreadsheet, would i have to pay taxes and penalties?
thanks
jim

paul.novell@gmail.com · March 21, 2015 at 9:49 am
Jim, CASH means the SHY ETF. In an IRA there are no taxes and penalties.
Paul

Ilya Zakreuski · March 27, 2015 at 6:22 am

Hi Paul,

I’ve noticed that recent dividends distribution broke performance stats in the tracking spreadsheet (some positions are showing up with -100% performance). I’ve fixed it for my tracking spreadsheet with a simple QUERY LIMIT 1 hack. Link to my Google Drive spreadsheet if you’re interested to check it out: Schwab GTAA – public.

Cheers,
Ilya

paul.novell@gmail.com · March 27, 2015 at 11:03 am
Yep, that happens. I’ve changed the formulas now. Thanks.
Paul