Summary
The methodology behind it is simple: if an ETF (indices were used in the original study) on the last day of a month above the 200-day line (price fluctuations during the month are ignored), the ETF is a possible investment.
Then calculate the average value of the 1, 3, 6 and 12 month performance of each ETF at the end of each month and then invests the entire capital only equally in the three top ETFs - provided they are above theirs 200-day line. Otherwise, the portion will be parked on the time deposit account or Cash.
This methodology described here is a summary of Mebane Fabers GTAA Top 3 strategy described in his paper which you can download here:
Quantitative Approach to Tactical Asset-Allocation
In this Blog Post you learn how you can implement that strategy with exchange traded funds.
You may also be interested in his two other papers which describe asset allocation concepts and relative strength/momentum strategies:
Global Asset Allocation
Relative Strength Strategies for Investing
You can follow that strategy on wikifolio here:
https://www.wikifolio.com/de/de/w/wfgtaa3top
Then calculate the average value of the 1, 3, 6 and 12 month performance of each ETF at the end of each month and then invests the entire capital only equally in the three top ETFs - provided they are above theirs 200-day line. Otherwise, the portion will be parked on the time deposit account or Cash.
This methodology described here is a summary of Mebane Fabers GTAA Top 3 strategy described in his paper which you can download here:
Quantitative Approach to Tactical Asset-Allocation
In this Blog Post you learn how you can implement that strategy with exchange traded funds.
You may also be interested in his two other papers which describe asset allocation concepts and relative strength/momentum strategies:
Global Asset Allocation
Relative Strength Strategies for Investing
You can follow that strategy on wikifolio here:
https://www.wikifolio.com/de/de/w/wfgtaa3top
USA Largecaps: Value iShares Edge MSCI USA Value Factor (WKN: A2AP35)
USA Largecaps: Momentum iShares Edge MSCI USA Moment. Factor (WKN: A2AP36)
USA Smallcaps: Value SPDR MSCI USA Small C. Value Weighted (WKN: A12HU5)
Aktien Industriest. ex USA: iShares STOXX Europe 600 (WKN: 263530)
Aktien Schwellenländer: iShares Core MSCI Emerg. Markets (WKN: A111X9)
USA Staatsanleihen: iShares USD Treasury Bond 7-10yr (WKN: A0LGP4)
Staatsanleihen 10 J. ex USA: iShares Euro Governm. Bond 7-10yr (WKN: A0LGQA)
USA Unternehmensanl.: SPDR Barclays US Corporate Bond (WKN: A1JJTU)
USA Staatsanleihen 30 J.: iShares USD Treasury Bond 20+yr (WKN: A12HL9)
Rohstoffe: iShares Diversified Commodity Swap (WKN: A2DK6R)
Gold: Xetra-Gold (WKN: A0S9GB)
Immobilien: iShares US Property Yield (WKN: A0LEW6)
USA Largecaps: Momentum iShares Edge MSCI USA Moment. Factor (WKN: A2AP36)
USA Smallcaps: Value SPDR MSCI USA Small C. Value Weighted (WKN: A12HU5)
Aktien Industriest. ex USA: iShares STOXX Europe 600 (WKN: 263530)
Aktien Schwellenländer: iShares Core MSCI Emerg. Markets (WKN: A111X9)
USA Staatsanleihen: iShares USD Treasury Bond 7-10yr (WKN: A0LGP4)
Staatsanleihen 10 J. ex USA: iShares Euro Governm. Bond 7-10yr (WKN: A0LGQA)
USA Unternehmensanl.: SPDR Barclays US Corporate Bond (WKN: A1JJTU)
USA Staatsanleihen 30 J.: iShares USD Treasury Bond 20+yr (WKN: A12HL9)
Rohstoffe: iShares Diversified Commodity Swap (WKN: A2DK6R)
Gold: Xetra-Gold (WKN: A0S9GB)
Immobilien: iShares US Property Yield (WKN: A0LEW6)
Multi-asset timing brings returns in every market situation
Higher returns = more risk? A myth. How to overcome the labyrinth of half-truths and moderate returns with a simple multi-asset timing strategy.
How likely do you think it is possible to always win no matter what happens in the markets? That there is a strategy that guarantees “returns like the stock market and volatility and risk like bonds”? And that this strategy can be implemented by every private investor with only five minutes of work per month? Unlikely, you say?
Then we show you now that we can be wrong about the odds when it comes to playing. Unless you use reliable data from several stock exchange decades, scientifically proven market anomalies, well-founded timing principles and create a strategy with which investors have not lost even one percent in any year since 1973.
A strategy that is prepared for every event in the future. Risk? Nothing. Annual returns? A matter of course - over a period of 40 years with only few ETFs. The details:
theory and practice
The basic idea comes from Mebane Faber, founder of Cambria Investment Management, an independent financial advisor who claims to manage over a billion dollars. The special thing about it: Cambria relies exclusively on “academically oriented investment solutions,” says Faber. What he means exactly becomes clear when one reads his much-cited scientific work "A Quantitative Approach To Tactical Asset Allocation".
His simple and ingenious approach: the combination of two methods that have been proven to significantly improve the risk-return ratio over a long period of time compared to simple buy & hold equity investments. A broad, equally weighted multi-asset portfolio, consisting of five asset classes, each of which is individually “timed” - namely GTAA (Global Tactical Asset Allocation).
The methodology behind it is simple: if an ETF (exchanged traded fund, indices were used in the original study) on the last day of a month is above the 200-day line (price fluctuations during the month are ignored), the 20 percent of the total capital flows into the ETF. If it is below the 200-day average, the money is parked in the secure overnight deposit account (original study: Treasury Bills).
The functionality of such a timing strategy has already been proven in various scientific studies. Faber's own investigations coincide with the findings. His backward calculation between 1973 and 2012 shows that not only US stocks that are above their 200-day line perform significantly better and are less volatile on average, but that this phenomenon also affects the international stock market and real estate stocks (REITs ) applies.
Commodities also bring significantly higher returns above the 200-day line. “On average, returns are 60 percent lower and volatility is 30 percent higher if the market is below its 200-day line,” summarizes Faber.
How likely do you think it is possible to always win no matter what happens in the markets? That there is a strategy that guarantees “returns like the stock market and volatility and risk like bonds”? And that this strategy can be implemented by every private investor with only five minutes of work per month? Unlikely, you say?
Then we show you now that we can be wrong about the odds when it comes to playing. Unless you use reliable data from several stock exchange decades, scientifically proven market anomalies, well-founded timing principles and create a strategy with which investors have not lost even one percent in any year since 1973.
A strategy that is prepared for every event in the future. Risk? Nothing. Annual returns? A matter of course - over a period of 40 years with only few ETFs. The details:
theory and practice
The basic idea comes from Mebane Faber, founder of Cambria Investment Management, an independent financial advisor who claims to manage over a billion dollars. The special thing about it: Cambria relies exclusively on “academically oriented investment solutions,” says Faber. What he means exactly becomes clear when one reads his much-cited scientific work "A Quantitative Approach To Tactical Asset Allocation".
His simple and ingenious approach: the combination of two methods that have been proven to significantly improve the risk-return ratio over a long period of time compared to simple buy & hold equity investments. A broad, equally weighted multi-asset portfolio, consisting of five asset classes, each of which is individually “timed” - namely GTAA (Global Tactical Asset Allocation).
The methodology behind it is simple: if an ETF (exchanged traded fund, indices were used in the original study) on the last day of a month is above the 200-day line (price fluctuations during the month are ignored), the 20 percent of the total capital flows into the ETF. If it is below the 200-day average, the money is parked in the secure overnight deposit account (original study: Treasury Bills).
The functionality of such a timing strategy has already been proven in various scientific studies. Faber's own investigations coincide with the findings. His backward calculation between 1973 and 2012 shows that not only US stocks that are above their 200-day line perform significantly better and are less volatile on average, but that this phenomenon also affects the international stock market and real estate stocks (REITs ) applies.
Commodities also bring significantly higher returns above the 200-day line. “On average, returns are 60 percent lower and volatility is 30 percent higher if the market is below its 200-day line,” summarizes Faber.
annual performance in the 10 worst years from 1900 to 2012 (in percent)
The various asset classes, all of which are valued individually on a monthly basis, create a chameleon portfolio that can be flexibly adapted to the current market situation and can protect investors from "their innate behavior patterns", Faber describes and concretely: "We humans use different parts of our brains when we lose money or win money. "
Put simply, the fact that high-risk assets are eliminated early and promising assets continue to promise positive returns almost always wins investors and never panic and blindly action.
The perfect balance
Particularly striking: In the 40 years in which the strategy was tested, the portfolio was always invested in at least four asset classes in 24 years. Flexibility that pays off: investors were able to generate an average total return of 10.48 percent per year. For comparison: The multi-asset portfolio without timing strategy was 9.92 percent, the S&P-500 brought 9.70 percent.
That is good - but it will only be really impressive when investors realize the risk associated with such returns. The average annual volatility of the timing strategy was 6.99 percent and the maximum drawdown was less than 10 percent - the American stock market experienced a volatility of just under 15.7 percent in the same period and temporarily halved in value.
In short: timing works. Timing with a diversified multi-asset portfolio works even better. The monthly adjustment logically also increases the transaction costs compared to classic buy & hold strategies, but the historical data clearly show how investors can stop negative threats early with such flexibility.
Actually, the story could end at this point. But that was just the beginning for Faber. His goal: even more return and constant risk. To this end, the expert updated his original scientific work a few years later and expanded the portfolio to a total of 13 asset classes and stuck to the usual timing method based on the 200-day line - with success.
With an annual average performance of 12.04 percent, the expanded portfolio generated significantly higher profits than the smaller portfolio, without showing significantly higher fluctuations. We have listed twelve suitable ETFs including the weighting according to Faber.
However, Faber is a perfectionist
It is therefore not surprising that he continues to research and sees more and more expansion options. The focus is primarily on the supposedly lost time, in which parts of the capital are in the overnight deposit account and bring no return. “On average, the 13-ETF portfolio has 30 percent cash on the bank. That pulls the overall performance down significantly, ”summarizes Faber, who also presents a solution.
His idea: If a 200-day line is cut negatively, the money does not flow into the overnight deposit account, but into ten-year US government bonds. These are also considered to be relatively low-volatility and low-risk, but in the past they have also achieved noteworthy returns compared to the money market.
Historically, the interest rate on such bonds averaged 4.55 percent. And even in the current low interest rate environment, there are still 2.10 percent. Compared to the classic timing strategy, investors would have been able to achieve an average return of 1.37 percent more per year without taking a significantly higher risk.
The maximum drawdown between 1973 and 2012 was 11.9 percent, well below the maximum losses that the American stock market (–50.95) or the multi-asset portfolio without timing (–42.66) suffered. And here, too, the chart analysis sends positive signals: All ETFs are currently above their 200-day line.
Power of momentum
And it gets even better - at least even more profitably. As the culmination of his scientific results, Faber has a very special surprise for every investment strategist who is still not satisfied with 12.04 percent annually. First of all: The workload is slightly higher, but the average return per year is 19.1 percent - without tricks or leverage products, but only with the power of momentum.
Here too, sound scientific knowledge serves as the basis. So momentum is considered one of the pronounced market anomalies in modern financial research. This states that stocks (in the case of ETFs) tend to over-yield if they have recently outperformed the market or comparable products. Faber himself has also written numerous works explicitly on the subject of momentum and created separate strategies that promise permanent excess returns.
In the case of the GTAA method, however, the momentum serves much more than the last piece of the puzzle, because while the 200-day line evaluates an asset based on its own performance, the momentum compares different assets with each other.
To do this, Faber calculates the average value of the 1, 3, 6 and 12 month performance of each ETF at the end of each month and then invests the entire capital only equally in the three top ETFs - provided they are above theirs 200-day line. Otherwise, the portion will be parked on the time deposit account as usual.
Based on the ETF selection, these are currently the asset classes USA Largecaps Momentum, Gold and Real Estate, which can have the best momentum. With an average volatility of 14.82 percent, this strategy is still less volatile than the American stock market and has also been able to significantly reduce maximum losses in the past.
Strong in the crisis. For investors, there are several ways and means of using scientific knowledge to significantly improve their risk-return profile and to secure their capital, particularly in times of crisis.
13 ETFs for maximum return
By expanding the basic portfolio, the individual asset classes will be diversified even more:
USA Largecaps: Value iShares Edge MSCI USA Value Factor (WKN: A2AP35) - 5 Prozent
USA Largecaps: Momentum iShares Edge MSCI USA Moment. Factor (WKN: A2AP36) - 5 Prozent
USA Smallcaps: Value SPDR MSCI USA Small C. Value Weighted (WKN: A12HU5) - 10 Prozent
Aktien Industriest. ex USA: iShares STOXX Europe 600 (WKN: 263530) - 10 Prozent
Aktien Schwellenländer: iShares Core MSCI Emerg. Markets (WKN: A111X9) - 10 Prozent
USA Staatsanleihen: iShares USD Treasury Bond 7-10yr (WKN: A0LGP4) - 5 Prozent
Staatsanleihen 10 J. ex USA: iShares Euro Governm. Bond 7-10yr (WKN: A0LGQA) - 5 Prozent
USA Unternehmensanl.: SPDR Barclays US Corporate Bond (WKN: A1JJTU) - 5 Prozent
USA Staatsanleihen 30 J.: iShares USD Treasury Bond 20+yr (WKN: A12HL9) - 5 Prozent
Rohstoffe: iShares Diversified Commodity Swap (WKN: A2DK6R) - 10 Prozent
Gold: Xetra-Gold (WKN: A0S9GB) - 10 Prozent
Immobilien: iShares US Property Yield (WKN: A0LEW6) - 20 Prozent
The backtesting calculation shows that with the basic strategy with five ETFs (GTAA 5), investors would have made positive profits in 39 out of 40 years. Only once was there a slight minus of 0.59 percent at the end of the year - and that was in 2008 in times of the financial crisis, when the global stock markets collapsed by over 50 percent and even multi-asset funds did not provide adequate capital protection. The supposedly aggressive top 3 strategy (GTAA top 3), which still uses the momentum as a bonus, even earned investors more than twelve percent in 2008 and only performed negatively in two out of 40 years.
Blessed is he who knows what to do when the markets shake. The stock market is getting more and more uneasy, profit warnings have recently been piling up in the Dax, China has been growing as slowly as it has been for a long time, in the US the central bank is reversing a role and even promising possible interest rate cuts. No black painting - but still a question of probability.
So how likely is it that the stock market will pop in the near future? The simple answer: doesn't matter anymore. Because with this strategy your probability of winning is almost 100 percent - at any time.
Proven crash protection
The historical data clearly show that the strategies according to Faber not only deliver reliable returns almost every year and beat all buy and hold strategies, but are also ideal as capital protection in times of crisis.
Put simply, the fact that high-risk assets are eliminated early and promising assets continue to promise positive returns almost always wins investors and never panic and blindly action.
The perfect balance
Particularly striking: In the 40 years in which the strategy was tested, the portfolio was always invested in at least four asset classes in 24 years. Flexibility that pays off: investors were able to generate an average total return of 10.48 percent per year. For comparison: The multi-asset portfolio without timing strategy was 9.92 percent, the S&P-500 brought 9.70 percent.
That is good - but it will only be really impressive when investors realize the risk associated with such returns. The average annual volatility of the timing strategy was 6.99 percent and the maximum drawdown was less than 10 percent - the American stock market experienced a volatility of just under 15.7 percent in the same period and temporarily halved in value.
In short: timing works. Timing with a diversified multi-asset portfolio works even better. The monthly adjustment logically also increases the transaction costs compared to classic buy & hold strategies, but the historical data clearly show how investors can stop negative threats early with such flexibility.
Actually, the story could end at this point. But that was just the beginning for Faber. His goal: even more return and constant risk. To this end, the expert updated his original scientific work a few years later and expanded the portfolio to a total of 13 asset classes and stuck to the usual timing method based on the 200-day line - with success.
With an annual average performance of 12.04 percent, the expanded portfolio generated significantly higher profits than the smaller portfolio, without showing significantly higher fluctuations. We have listed twelve suitable ETFs including the weighting according to Faber.
However, Faber is a perfectionist
It is therefore not surprising that he continues to research and sees more and more expansion options. The focus is primarily on the supposedly lost time, in which parts of the capital are in the overnight deposit account and bring no return. “On average, the 13-ETF portfolio has 30 percent cash on the bank. That pulls the overall performance down significantly, ”summarizes Faber, who also presents a solution.
His idea: If a 200-day line is cut negatively, the money does not flow into the overnight deposit account, but into ten-year US government bonds. These are also considered to be relatively low-volatility and low-risk, but in the past they have also achieved noteworthy returns compared to the money market.
Historically, the interest rate on such bonds averaged 4.55 percent. And even in the current low interest rate environment, there are still 2.10 percent. Compared to the classic timing strategy, investors would have been able to achieve an average return of 1.37 percent more per year without taking a significantly higher risk.
The maximum drawdown between 1973 and 2012 was 11.9 percent, well below the maximum losses that the American stock market (–50.95) or the multi-asset portfolio without timing (–42.66) suffered. And here, too, the chart analysis sends positive signals: All ETFs are currently above their 200-day line.
Power of momentum
And it gets even better - at least even more profitably. As the culmination of his scientific results, Faber has a very special surprise for every investment strategist who is still not satisfied with 12.04 percent annually. First of all: The workload is slightly higher, but the average return per year is 19.1 percent - without tricks or leverage products, but only with the power of momentum.
Here too, sound scientific knowledge serves as the basis. So momentum is considered one of the pronounced market anomalies in modern financial research. This states that stocks (in the case of ETFs) tend to over-yield if they have recently outperformed the market or comparable products. Faber himself has also written numerous works explicitly on the subject of momentum and created separate strategies that promise permanent excess returns.
In the case of the GTAA method, however, the momentum serves much more than the last piece of the puzzle, because while the 200-day line evaluates an asset based on its own performance, the momentum compares different assets with each other.
To do this, Faber calculates the average value of the 1, 3, 6 and 12 month performance of each ETF at the end of each month and then invests the entire capital only equally in the three top ETFs - provided they are above theirs 200-day line. Otherwise, the portion will be parked on the time deposit account as usual.
Based on the ETF selection, these are currently the asset classes USA Largecaps Momentum, Gold and Real Estate, which can have the best momentum. With an average volatility of 14.82 percent, this strategy is still less volatile than the American stock market and has also been able to significantly reduce maximum losses in the past.
Strong in the crisis. For investors, there are several ways and means of using scientific knowledge to significantly improve their risk-return profile and to secure their capital, particularly in times of crisis.
13 ETFs for maximum return
By expanding the basic portfolio, the individual asset classes will be diversified even more:
USA Largecaps: Value iShares Edge MSCI USA Value Factor (WKN: A2AP35) - 5 Prozent
USA Largecaps: Momentum iShares Edge MSCI USA Moment. Factor (WKN: A2AP36) - 5 Prozent
USA Smallcaps: Value SPDR MSCI USA Small C. Value Weighted (WKN: A12HU5) - 10 Prozent
Aktien Industriest. ex USA: iShares STOXX Europe 600 (WKN: 263530) - 10 Prozent
Aktien Schwellenländer: iShares Core MSCI Emerg. Markets (WKN: A111X9) - 10 Prozent
USA Staatsanleihen: iShares USD Treasury Bond 7-10yr (WKN: A0LGP4) - 5 Prozent
Staatsanleihen 10 J. ex USA: iShares Euro Governm. Bond 7-10yr (WKN: A0LGQA) - 5 Prozent
USA Unternehmensanl.: SPDR Barclays US Corporate Bond (WKN: A1JJTU) - 5 Prozent
USA Staatsanleihen 30 J.: iShares USD Treasury Bond 20+yr (WKN: A12HL9) - 5 Prozent
Rohstoffe: iShares Diversified Commodity Swap (WKN: A2DK6R) - 10 Prozent
Gold: Xetra-Gold (WKN: A0S9GB) - 10 Prozent
Immobilien: iShares US Property Yield (WKN: A0LEW6) - 20 Prozent
The backtesting calculation shows that with the basic strategy with five ETFs (GTAA 5), investors would have made positive profits in 39 out of 40 years. Only once was there a slight minus of 0.59 percent at the end of the year - and that was in 2008 in times of the financial crisis, when the global stock markets collapsed by over 50 percent and even multi-asset funds did not provide adequate capital protection. The supposedly aggressive top 3 strategy (GTAA top 3), which still uses the momentum as a bonus, even earned investors more than twelve percent in 2008 and only performed negatively in two out of 40 years.
Blessed is he who knows what to do when the markets shake. The stock market is getting more and more uneasy, profit warnings have recently been piling up in the Dax, China has been growing as slowly as it has been for a long time, in the US the central bank is reversing a role and even promising possible interest rate cuts. No black painting - but still a question of probability.
So how likely is it that the stock market will pop in the near future? The simple answer: doesn't matter anymore. Because with this strategy your probability of winning is almost 100 percent - at any time.
Proven crash protection
The historical data clearly show that the strategies according to Faber not only deliver reliable returns almost every year and beat all buy and hold strategies, but are also ideal as capital protection in times of crisis.
yearly performace in %
