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11/30/2016 100% S&P 500 (or leveraged 75% S&P 500/25% SPXL) 5/31/2017 100% Total International (or leveraged 75% Total International/25% EURL) 2/28/2018 50% Total International/50% ST Treasury Bonds 3/29/2018 100% Total International (or leveraged 75% Total International/25% EURL) 6/29/2018 100% S&P 500 (or leveraged 75% S&P 500/25% UPRO) 10/31/2018 50% S&P 500/50% ST Treasury Bonds 11/30/2018 100% ST Treasury Bonds 12/31/2018 50% REIT/50% ST Treasury Bonds 1/31/2019 100% REIT (or leveraged 75% REIT/25% DRN) 12/31/2019 100% S&P 500 (or leveraged 75% S&P 500/25% SPXL)
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S&P 401k Bkg Bkgx1.5 2010 15% 29% 29% 36% 2011 2% 25% 51% 75% 2012 16% 12% 19% 21% 2013 32% 22% 22% 33% 2014 14% 15% 15% 23% 2015 1% -7% -3% -5% 2016 12% 3% 2% 4% 2017 22% 22% 22% 30% 2018 -4% -1% -1% -4% 2019 31% 22% 22% 27% 2020YTD 0% 0% 0% 0%
The Permanent Portfolio investment strategy is based on the economic cycle which Harry Brown divides into four basic categories:
Prosperity / Inflation / Deflation / Recession
At the risk of sounding heretical, I see the economic cycle as more of an continuum moving towards or reversion from Deflation or Inflation with Recession at either extreme:
Recession <==> Deflation <==> Prosperity <==> Inflation <==> Recession
In this world view, Stock asset classes do well in the middle but shift to Gold during Deflation or to Long Bonds during Inflation. Cash plays more of a recessionary role. This view suggests application of momentum separately for Stock asset classes and Gold/Long Bonds, when they are both showing positive momentum you are likely in an economic oscillation between Prosperity and Inflation/Deflation. By applying momentum separately it ensures the strategy is in a diversified position to capitalize on a movement in either direction. If volatility becomes excessive then things get kicked out to cash.
Disclaimer: This is not meant to be a recommendation of any kind, simply my personal observations as I have tried to develop an easy to use trading system using the PP asset classes as a starting point. I personally trade the leveraged version of the strategy explained below. Some of the below info is repeated from prior posts in an attempt to summarize my journey.
Both early literature and my personal journey with momentum strategy starts out with ranking schemes, then evolves into various asset allocations going by various names: Absolute, Adaptive, Dual, Elastic, Flexible, Minimum Variance, Modern, Relative, Risk Parity, Tactical, etc. They are all variations an a consistent theme which is variable allocation across assets using returns, correlations, covariances, volatilities, or other "crash protection" schemes.
The problem with these generalized momentum strategies is varying degrees between trading costs and missed returns from late reentry after significant corrections. First, most of the momentum strategies require many trades to be effective. A couple of ways to reduce trading are: using few asset classes, using round numbers for allocating assets, or requiring consecutive buy or sell signals.
Secondly, momentum tends to miss out on returns from late reentry after a correction. It shouldn't be a huge surprise this occurs as momentum is based on winning picks continuing to win, but when there are large corrections you will want to find a way to get in before the bounceback happens. There are a bunch of ways to do this whether by CAPE or other financial ratios, macroeconomic indicators such as unemployment, or at worst long term momentum. There is considerably less literature available available on methods of doing this, I believe because the various methods used affects asset classes differently (macroeconomic effects on stocks vs bonds) or are not comparable across asset classes (P/E for gold?). While I have spend a lot of time developing a macroeconomic indicator, I get nearly the same bang from simply using long term momentum.
Lastly, parameter choices abound. Be careful about overfitting the data especially if you aren't using daily data (or even if you're using daily data). Simple is better as it is less likely to break in the future.
Attempting to remedy these shortcomings, I propose a basic monthly trading strategy with the following assumptions:
Momentum "Prosperity" Building Block: Dual Momentum of Stock Asset Class(es), 12-month lookback of returns over SHY, pick the Top 1 positive
Momentum "Risk Off" Building Block: Dual Momentum of Long Bonds and Gold, 12-month lookback of returns over SHY, pick the Top 1 positive
Value "Prosperity" Building Block: Absolute Momentum of a Stock Asset Class, 5-year lookback of current month end price over average(54-66 month end prices)
Asset Class Selection: If there are "Prosperity" building blocks, then take the "Prosperity" asset class with the lowest 60-day volatility. If there is only a "Risk Off" building block it is used.
Asset Class Allocation: Volatility is scaled to a target annual volatility rounded to 0%, 50%, or 100%. In Excel terms this is: Round(target*sqrt(252)/60-day volatility*2,0)/2
Risk-Free Allocation: Anything not allocated to "Prosperity" or "Risk Off" asset classes is allocated to SHY
While this basic strategy may seem anything but basic, I am simply picking the best momentum asset classes based on a 1-year lookback separately for "Prosperity" (for returns) and "Risk Off" (for drawdowns) along with a "Prosperity" asset class below its 5-year prior price (for returns) and then with preference for "Prosperity" (for returns) selecting the the asset with the lowest volatility (for volatility) allocating based on the volatility (for drawdowns). Rounding is done to reduce trade volumes.
Because not everyone has a long treasury bond or gold fund in their 401k, I have a simplified version of the model that replaces these classes with SHY (or any short term instrument). For those willing to take a little more risk using daily 3x leveraged funds such as UPRO/TMF/UGLD for a portion of their holdings returns could be further increased.
The Nominal Returns for Jan 1970 - Dec 2018 are as follows:
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CAGR MaxDD UPI Trades/Yr IG Bkg (1.5x Lev) 31.0% -37.2% 2.43 5.4 IG Brokerage 21.5% -26.3% 2.07 4.3 IG 401k 18.9% -26.3% 1.80 3.4 PP (15/35) 9.2% -21.4% 0.43 1.2 PP (20/30) 8.8% -19.8% 0.41 3.2 S&P 10.1% -55.3% 0.25
The last item worth mentioning is that Antonacci's GEM momentum approach seems to garner a lot of attention. I have personally come to dislike the portfolio the more I play with it as it is does not seem to perform consistently throughout economic cycles, particularly during environments where interest rates are rising.
I'd be happy to recommend academic literature or data sources if anyone interested in learning more. Hopefully some of my ramblings will help someone looking for a practical momentum-based approach that outperforms buy and hold portfolios.
EDIT: Some portions of my original post have been updated to include my personal investment model. I have updated the historical returns YTD through 2019 and recent trades/performance at the top.