In this very important post we highlight an asset class rotation strategy that is increadibly powerful in rewarding investors with a high absolute return (over 27% compounded average annual return) over the last 10 years (2003-2012) with low volatility and low drawdowns.
The main benefits of tactical asset allocation based on relative strength and adequate filters is to allow an investor to participate in large upward trends while being protected from the large drawdowns that come with bear markets. Capital markets have always been interconnected, with clear long term correlations. Being able to timely rotate from an asset class to another depending on their relative performance is key to steadily grow an account and avoid arge declines in risk assets. To achieve such an outcome, there are several requisites:
- Determine a universe of asset classes where representing ETFs are sufficiently broad and uncorrelated and cover most of the spectrum of investing opportunities. We use this ETF universe.
- Have a clear set of time-tested rules that ensure a consistent asset class rotation able to deliver strong risk-adjusted returns while managing risk
There are a number of ways to do so, depending on an investor’s style and risk appetite, as highlighted in the results table available in the Asset Class Rotation page. Beyond our turn-key portfolios, our Premium members can use these rankings and table to invest in the Top 1, Top 2, … or Top 5 best performing asset classes every couple of weeks or every month.
In this post we feature the outcome of investing in the Top 4 asset classes, reblanced twice a month. The graph below underscore the outstanding and consistent performance of the model year after year over the last 10 years, whatever the financial environment (bull, bear, sideways risk asset markets). At the end of each rebalancing period, the model invests 25% in each of the Top 4 asset classes that rank better than cash. The chart plots the equity curve of a portfolio following this strategy for the past 10 years with a starting value of $100,000:
The table below summarizes the yearly performance of the model:
Premium Members can access the bi-monthly updated rankings that allow them to follow this Top4 strategy.
More statistics and details to come on the Fastlane Model Portfolio in the days to come.