At www.simpleallocation.com, we have created a rotating allocation model. The model picks the recent "best" performers from a specified portfolio for investment during the next month or quarter. (We have two time frames that we model; monthly and quarterly.) The model is a "rotating" model due to this nature of rotating-in the top performers, selected from a larger portfolio of securities. The model will only allocate to a maximum of 6 securities at any given time, and may allocate to as few as zero securities. This article is a review of performance of this model to a buy-and-hold strategy using a variety of allocations with the buy-and-hold portfolio. A frequent source of confusion is that we publish "annualized gains" with our model output, while most people will refer to the average annual return generated by some other model or system. Please read this blog post (Volatility - why two strategies with the same average gains can have very different total return) to understand that annualized gain and average annual gain can be very different. Average annual gain "inflates" the actual gain compared to what most expect. It is not a real reflection of what an investor could expect to achieve after compounding. The result is that people often see our modeled annualized gain, and not realize how good the modeled returns really are. (Yes, we could fool you with average annual gain, but we'd rather be honest. To us that means if you compound your annual gain, you get the expected return; not the case with average annual gain.)
That said, lets move to comparing the Simple Allocation method to a more common buy-and-hold approach. (Link to Google document used for the modeling. Make a copy and try it yourself. )
For all comparisons we will use the Simple Allocation ETF Portfolio 001 (http://www.simpleallocation.com/allocation-plans/etf/etf-portfolio-001) compared to some other mix of ETFs using a buy-and-hold strategy.
Simple Allocation ETF Portfolio 001 versus Lazy Portfolio (60% stock, 20% bond, 20% real estate)
For this first comparison we will use the following portfolio:
The Simple Allocation plan has higher return; $3.02 for Simple Allocation compared to $2.07 for buy-and-hold (starting with a $1 balance) The Simple Allocation plan had about an 18% drawdown during the 2008 downturn, compared to over 50% for the buy-and-hold strategy.  But this buy-and-hold portfolio does have a large real estate exposure. So lets try another allocation more weighted to stocks. Simple Allocation ETF Portfolio 001 versus Lazy Portfolio (60% stock, 40% bond)
For this comparison we will use the following portfolio:
Again, the Simple Allocation plan is better; more gain, less volatility.
 Lets try more stock, this time adding in value stocks. Simple Allocation ETF Portfolio 001 versus Lazy Portfolio (80% stock, 20% bond)
For this comparison we will use the following portfolio:
 We are going to stop there, as we think you get the point. There is one major issue we do want to address prior to concluding. The ETF Portfolio 001 has 36 securities from which the model chooses on any given month. When we model the lazy portfolio, we only modeled a maximum of 4 different securities. Of course, the Simple Allocation plan is never allocated to more than 6 securities at one time, sometimes less, so the comparison is more valid than it may seem.
Also, the whole point of the Simple Allocation strategy is that if you had a list of 36 securities from which YOU had to chose each month, what would you do? You'd pick a simple portfolio of 3-5 securities and buy-and-hold.
If you'd like to suggest a different portfolio for comparison, contact us via private message from one of our social media sites.
Thanks for reading!
Paul F. Dunn - Owner Simple Allocation LLC - Simple investment allocation for the experienced investor www.SimpleAllocation.com |
