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Allocation Strategy
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what is an allocation strategy
A strategy is a plan of action or policy designed to achieve a major or overall aim. An allocation strategy's aim should be to increase your risk adjusted return over your investment horizon. Your investment horizon is not the date when you retire and start taking out funds unless you chose to accept annuities. It is the entire time you have funds in your account, hopefully you and/or your spouse's entire life. This is why risk matters so much in understanding allocation strategies
Your aim is to retire comfortably by growing the biggest nest egg possible while not being stressed about major market losses in the interim. If you look at any 40 year period in history, you will not find a steady, straight-line return in the market. You will see long bull markets and devastating bear markets. To ignore the give and take of the market by simple employing a buy and hope strategy is to accept risk you will wish you had avoided when you are in retirement.
What we looked for when developing an allocation strategy was one that could be employed by TSP funds (or index funds in a IRA), required few adjustments annually, reduced exposure to market risk, and beat the indexes over a full cycle of the stock market (bull and bear). This last point is important to understand. Our goal was not to beat the indexes every year, but to beat the index over the entire course of a bull and bear market. By not chasing short term returns we were able to develop a strategy that significantly beat the indexes' long term returns by simply avoiding market exposure during those times most likely to see corrections and significant losses. What about the Life-Cycle Funds (L Funds)? The problem is they keep you invested 100% of the time by diversifying your investment among all the funds. The portion invested in the equity funds will still take a big hit during bear markets. The F Fund is invested in bonds which have been in a secular bull market with interest rates now bouncing along at the lowest rates in history. In order for them to continue to perform as well rates need to continue to fall...they can not, so you at best will be stuck with their now low yields. At worse rates will start to rise and the prices will start seeing capital losses.
What is an allocation model? An allocation model applies a strategy to a specific fund or asset class in order to determine the dates to re-allocate and the allocation percentages. The models simply track performance of each index fund based on our timing signals. They use the same strategy and the large caps use the same timing signal and the small caps use a different based on the action of the non-sp500 index (all stocks not in the SP500).
Our hope is to improve our returns further by combining this annual seasonal strategy with our RISK INDICATOR in order to avoid additional bear market losses and gain more of the initial bull market gains. I can not envision a simpler low risk strategy that can significantly beat a buy & hold strategy or lifecycle fund over the full market cycle.
Our models are listed below. | S Fund Model (25 yr)
S Fund Model (13 yr)
C Fund Model (13 yr)
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Our Learning Center provides an in-depth understanding of our strategy. But first let's take a look at our five models.
Expedient Timing: Our newest model is the only model that includes some subjective decision-making to include adjustments to our mechnical timing signals. For example, if our bull/bear indicators tell us the market has topped we may reduce exposure to equities.
Bellwether Timing: During further research we discovered the total US stock market provides the best signal for the beginning and end of the favorable for bother large and small cap stocks. This made it a no-brainer to use for all our timing models since this greatly simplified communicating and reduced confusion on when to enter and exit all funds. To be clear, we only have one objective formula for entering and exiting equities and it uses the total US stock market via the VTI ETF to provide our signal.
Our old models used each fund to generate their own signal, but now they are used to merely track performance of each fund using the Bellwether signal.
Advantage W model (Total US Stock Market): Designed to track the total US stock market similar to the Wilshire 5000 index. We recommend the VTI ETF for IRA/401K self-managed accounts. (See Results). There is no TSP fund for the total US stock market. It requires 4 parts TSP C fund to 1 part TSP S fund to mimic.
Advantage S Model (non-sp500 index): This model tracks the performance of US stocks not in the SP500 index which we refer to as the non-sp500 index. We recommend the VXF ETF for 401K and IRA accounts. This is the TSP S fund model.
Advantage C Model (SP500 index): The models tracks the performance of SP500 index funds (TSP C fund). We recommend the VOO ETF for IRA/401K self-managed accounts which also tracks the S&P500 index, but any fund that tracks the S&P500 can use this timing signal.
Advantage R model (Russell 2000 index): Provides tracking of performance of the Russell 2000 index via the IWM ETF. We recommend the IWM ETF for self-managed IRA/401K accounts. The small cap stocks show the highest seasonal tendencies.
Advantage D model (DOW): Tracks the performance of the Dow Jones Industrial Averages by investing in the DIA ETF and using the Bellwether timing signal.
The models provided are to help members making smarter allocation decisions.
We provide the historical performance of the models and track these models for your information. Our members will receive e-mail alerts at least a day prior to the date a re-allocation should be made.
Our RISK INDICATOR: I've been developing risk indicator to help avoid bear market losses. I am trying to make it an objective signal but the lack of an extended history of data (1998 - 2018) makes this challenging. Still it often provides leading indications for stock market corrections and deep losses. Since it does not use the stock market for signals, it provides a unique input. It uses the actions of risk-sensitive investors in high yield bonds. I find it is an excellent tool to have in our investor tool kit. I have looked at many, many other potential indicators and none provide a clear advantage. For example, market internals are useful for understanding the market but do not always provide actionable signals.
Combining several indicators with a meta-analysis of many opinions on the market informs my subjective opinions. It should be understood that any investor who begins to pull money off the table near the market's peak will under-perform the market during that time. My concern is to avoid those large set-backs that take years to recover from, but still capture as much of the gains in the bull market as possible.
Now let's discuss Applying Seasonal Filters.