Risk Asset Allocation Based On Momentum Relative To T-Bills

You would need to find the performance evaluation period (e.g. the number of days, weeks, months quarters, years) that produces the best combination of high return and low maximum drawdown, based on long-term history, and the best frequency of decision making (e.g. daily, weekly, monthly quarterly or longer). The “best fit” evaluation period and decision frequency will probably drift over time, so it needs to be regularly evaluated for adjustment.

The information that follows gets a bit into the weeds of the approach.

The securities we used for the test were selected in part because they had adequate history to capture a sufficiently long study period:

  • VFINX: S&P 500
  • VGTSX: total international stocks
  • VEIEX: emerging markets stocks
  • VGSIX: US real estate
  • VFITX​: intermediate-term Treasuries
  • Treasury Bills

ETF alternatives may be more tax efficient for current use but did not have sufficient history for long-period analysis. These ETFs are classes that invest in and share the same underlying portfolio as the mutual funds used in the study (except for BIL):

  • VOO: S&P 500
  • VXUS: total international stocks
  • VWO: emerging markets stocks
  • VNQ: US real estate
  • VGIT: intermediate-term Treasuries
  • BIL: Treasury Bills

If the investor wishes to use options (for example, covered Calls) on the S&P 500 position, then SPY would be needed because it has the options and liquidity that would be suitable.

There are other ETFs from other sponsors that could just as well be used instead of the Vanguard ETFs in a forward practice.

First, Portfolio Visualizer is among the sites that provide good tools for experimenting with the approach, and it is free. There are subscription sites that have a number of pre-built models that can be followed as well.

The data that follows is entirely from Portfolio Visualizer.

The tables above and below illustrate how the evaluation period and frequency might be regularly reviewed for possible adjustment, and provide evidence of the efficacy of the approaches from 1997 to 2018 YTD, as well as return, maximum drawdown and several other important metrics for the results for method and their benchmarks.

The illustrative cases are for the S&P 500 as a single risk asset versus T-Bills (above); and the best 2 of 5 risk assets versus T-Bills (below).

The charts and tables that follow are for S&P 500 versus T-Bills, and for selecting the best 2 of 5 assets (S&P 500, DM stocks, EM stocks, US REITs, and Intermediate-term Treasuries) versus T-Bills.

In each case, the backtest period was about 22 years (1997-2018 YTD).

In the best 2 of 5, the result could be 2 risk assets, 1 risk asset and T-Bills, or all T-Bills.

Single Risk Asset vs T-Bills

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Disclaimer: "QVM Invest”, “QVM Research” are service marks of QVM Group LLC. QVM Group LLC is a registered investment advisor.

Important Note: This report is for ...

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Harry Goldstein 2 years ago Member's comment

Good read, than you.