I’ve studied asset allocation significantly since 1999. In Nobel Winning studies on Economics it’s been found that an investors asset allocation will determine more than 90% of their likelihood of success. Even with this overwhelmingly important fact, most investors fail significantly at understanding what the study means and how to actually use asset allocation effectively.
Beginning in October of 2011 I started publishing a free Tactical Asset Allocation model that measures what I feel to be the 4 key investment asset classes: Stocks, Bonds, Real Estate, and Gold. These are measured by index funds managed by Vanguard (for stocks, bonds, and real estate) and State Street Global Advisors (for gold). The reason to keep the asset classes simple is so that the actual data is easy to understand. Many investors over-complicate their asset allocation by using 20 different stock asset classes and just as many for bonds, alternatives, etc. This creates noise, volatility, and more expensive portfolios. Keeping it simple, cost effective, and easy to understand and use is the name of the game for how I measure effective Asset Allocation.
Here’s the complete live history of my Balanced Tactical Allocation Monthly Feature:
| Stocks (Vanguard Total Stock Market ETF as proxy) | Bonds (Vanguard Total Bond Market ETF as proxy) | Real Estate (Vanguard REIT ETF as proxy) | Gold (SPDR Gold ETF as proxy) | |
|---|---|---|---|---|
| September 2011 | 0% | 55% | 7% | 38% |
| October 2011 | 0% | 62% | 0% | 38% |
| November 2011 | 0% | 60% | 0% | 40% |
| December 2011 | 0% | 58% | 0% | 42% |
| January 2012 | 0% | 71% | 0% | 29% |
| February 2012 | 4% | 57% | 9% | 30% |
| March 2012 | 17% | 58% | 12% | 13% |
| April 2012 | 17% | 55% | 18% | 10% |
| May 2012 | 16% | 61% | 23% | 0% |
| June 2012 | 5% | 69% | 26% | 0% |
| July 2012 | 13% | 61% | 26% | 0% |
| August 2012 | 13% | 62% | 25% | 0% |
| September 2012 | 17% | 58% | 25% | 0% |
| October 2012 | 18% | 55% | 18% | 9% |
| November 2012 | 21% | 59% | 15% | 5% |
| December 2012 | 22% | 57% | 17% | 4% |
| January 2013 | 19% | 54% | 15% | 12% |
| February 2013 | 25% | 50% | 17% | 8% |
| March 2013 | 23% | 54% | 19% | 4% |
| April 2013 | 24% | 52% | 22% | 2% |
| May 2013 | 20% | 56% | 23% | 1% |
| June 2013 | 29% | 55% | 15% | 1% |
Here’s the returns of the model including a backtest* going back to 1/1/2005:
| Balanced Tactical Asset Allocation Model | 50% Total Stock Market 50% Total Bond Market |
|
|---|---|---|
| 2005 | 6.60% | 4.31% |
| 2006 | 13.33% | 8.70% |
| 2007 | 5.93% | 4.99% |
| 2008 | -0.96% | -18.99% |
| 2009 | 24.21% | 13.36% |
| 2010 | 15.51% | 8.08% |
| 2011 | 0.38% | 3.33% |
| 2012 | 8.10% | 9.36% |
| 2013 (as of 6/1) | 4.56% | 6.13% |
Here’s the annualized returns and risk/reward metrics of the model including a backtest* going back to 1/1/1997:
| Balanced Tactical Asset Allocation Model | 50% Total Stock Market 50% Total Bond Market |
|
|---|---|---|
| Annualized Return (as of 5/1/2013) | 8.97% | 6.40% |
| Risk (5 Yr Standard Deviation) | 8.95% | 12.32% |
| Best Month | 5.03% | 5.85% |
| Worst Month | -5.06% | -10.10% |
*Backtest assumes perfect execution of trades and does not take into account slippage, assumes re-investment of all dividends and interest, no distributions from model, and assumes a hypothetical cost or fee of 2% per year deducted pro-rata on a monthly basis. Slippage is the difference in price an investor might have actually gotten upon placing a trade order and the perfect closing price assumed in the model. Including this limitation, backtesting has other limitations as well including an investors ability to completely remove emotion from their investing process and actually follow a statistical model. Backtesting is also done with the benefit of hindsight; i.e., the model was created knowing it would have worked historically. I feel backtesting is important but in no way is a guarantee a model will work the same in the future as it may have “hypothetically” worked as a model. Performance published from 9/30/2011 to latest month end is live returns of an actual model account with real dollars invested paying a fee as described above.
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