GTAA - The path to the optimal model (Part 2)

Dear Quins,

Following my short introduction to GTAA (Global Tactical Asset Allocation) (Link 1), there were a few questions about creating your own model. So I spent some time thinking about the best way to explain this process in a way that is easy to understand but still exciting. Here is the result. Have fun!

Step 1: GAA - Global Asset Allocation

Step 2: GTAA 1 - GAA with Dual Momentum

Step 3: GTAA 2 - GTAA with asset differentiation

Step 4: GTAA 3 - GTAA with factor

Step 5: GTAA 4 - Optimized GTAA

6th bonus: GTAA Max

7. conclusion

8. links

Step 1: GAA - Global Asset Allocation

i. Selection of assets

The first question when building a global asset allocation portfolio is: Which asset classes are there and which can be invested in via ETFs? All you need to do is take a look at the categories in an ETF search on a good ETF portal (link 1). This shows the usual suspects: Equities, Bonds, Commodities, Money Market, Real Estate, Crypto.

Here we are looking for a cheap ETF for each asset class that covers the entire class as far as possible. Crypto is left out (sorry, dear crypto fans, but the compensation follows at the end, I promise!). That means:

Equities: All-World ETF;

Bonds: Aggregate Bond ETF;

Commodities: All Commodity Index ETF;

Real estate: Global Reit ETF;

Money market: Overnight money

ii. Backtest

How has this world portfolio performed in comparison with B&H All-World ETFs over the last 20 years? For the backtest comparison we use the powerful tool "Portfoliovisualizer" (link 2).

Unfortunately, there are a few limitations: Tradable all-world ETFs have only been around for about 10 years, and an all-commodity ETF has only been available in the tool since 2008. Accordingly, you have to find similar or similarly positioned assets for backtesting. In our case these are:

SPY (S&P500 for All-World ETF)

LSGBX (Intl. Bonds for Aggregate Bond ETF)

^GOLD (gold index for commodities);

VGSIX (REITs ETF for real estate).

If one weights the assets in GAA analogous to the ARERO world fund with 50-35-15-10 and compares the portfolio with both the S&P500 and the classic 50-30-20 world portfolio, then 10000$ in the period 2001-2022 became the following (Link 3 - please enter it yourself for verification!)

Results (portfolio, final amount, annual return, maximum drawdown)

S&P500: $44,046 6.97% -50.80%

World portfolio: $39,215 6.41% -55.93%

GAA:
$47,394 7.33% -34.62%

Compared to the S&P500, the classic world portfolio is slightly worse in every respect: less return with more risk. The GAA portfolio is slightly better in every respect.

To think further: In the savings plan, the order is reversed (feel free to try it out!). A different weighting of the assets also has a noticeable impact on performance in some cases.

Step 2: GTAA 1 - GAA with dual momentum

i. Selection of the strategy

Once the asset allocation is in place, the question arises as to which easy-to-understand and low-maintenance strategy could be used to reduce risk and increase opportunities. Two classic candidates: 200-day strategy and dual momentum.

The 200-day strategy has the following, extremely simple rule: hold an asset if it is quoted above the 200-day average at the end of the month, otherwise hold cash.

Dual Momentum has the following two rules. 1: On the last day of the month, add up the respective return of 1,3,6,12 months for each asset and rank them in order. Rule 2: If the strongest asset is trading above the momentum of cash, invest the entire capital in this asset. Otherwise, hold cash.

ii. Backtest

Let's apply the two timing strategies, GD200 and Dual Momentum, to GAA and compare them with each other and with B&H S&P500 (link 4).

Results (portfolio, final amount, annual return, maximum drawdown)

S&P500 $44,046 6.97% -50.80%

GAA $47,143 7.30% -33.60%

GD200 $44,293 6.92% -12.70%

GTAA1
$86,959 10.33% -29.06%

The GD200 model has about the same return as B&H S&P500, but with dramatically lower risk (return sequence important for safe withdrawal rate in retirement!). The GAA Dual Momentum model has a medium risk with significantly higher performance.

To think further: Other averages (e.g. 100d) or momentum periods (e.g. 1.6 months) change the performance, sometimes considerably. There are a number of other simple and complex models on a monthly basis (Gebert's stock market indicator).

Step 3: GTAA 2 - GTAA with asset differentiation

i. Expansion of the assets

Can the return be increased if Dual Momentum selects the strongest asset not only between different asset classes, but also between different markets within these asset classes? We assume the following classic differentiation of asset classes:

Equity market: USA, EU, EM (SPY VEURX VEIEX)

Bonds: US Treasuries, global bonds (VBMFX ESICX)

Real assets: Gold, real estate (VGSIX ^GOLD)

ii. Backtest

Let us now apply Dual Momentum to the new, differentiated GAA.

Results (portfolio, final amount, annual return, maximum drawdown)

S&P500 $44,046 6.97% -50.80%

GAA $47,143 7.30% -33.60%

GTAA1 $86,959 10.33% -29.06%

GTAA2 $102,498 11.16% -30.37%

Splitting the asset classes into regions leads to a further increase in returns with almost the same risk.

To think further: different time periods have different average performance. The GAA model shows its full strength especially in difficult market phases, e.g. 2001-2009.

Step 4: GTAA 3 - GTAA with factor

i. Optimization of the assets

Can the classic factor premiums (growth, small cap) perhaps be used for further differentiation in uncorrelated asset classes so that dual momentum can show its strengths even better?

A lot of research is needed here. 1. not all factors in the tool are testable up to 2001. 2. not all testable assets are tradable as ETFs in Germany or with your own broker. 3. the offer is constantly changing. So you have to compare, make compromises and keep looking.

I have found the following tradable factors that have little correlation:

US-Large-Growth: Nasdaq100 (QQQ)

EU-Small: EU Small Caps (PRIDX)

EM-Small: EM Small Caps (DEMSX)

US Bonds: 30y Treasuries (VUSTX)

World Bonds: Global Bonds (LSGBX)

Real assets: Gold (^GOLD), Real estate (VGSIX)

ii. Backtest:

Results (portfolio, final amount, annual return, maximum drawdown)

S&P500 $44,046 6.97% -50.80%

GAA $47,143 7.30% -33.60%

GTAA1 $86,959 10.33% -29.06%

GTAA2 $102,498 11.16% -30.37%

GTAA3
$117,392 11.85% -29.16%

Performance continues to improve without any increase in risk. The model already comes close to a 12-fold increase in capital 2001-2022, but there is more to come!

To think further: The markets can be broken down into further factors, e.g. value, momentum or combinations of these, e.g. EU Small Cap Value. Or into regions: Japan, frontier markets. There are ETFs for almost(!) everything.

Step 5: GTAA 4 - Optimized GTAA

i. Optimization of the model

Can performance be further increased and the risk reduced at the same time? Again, a lot of research is required to 1. find comprehensible adjustment screws and 2. the optimal application. I have found the following optimizations so far.

To increase the return: 1. concentration of the model on the best assets. Those assets that reduce the overall return are removed. 2. focus not only on one top momentum asset, but also on two or three. The strongest combination remains.

To reduce risk: 1. apply the GD200 strategy. 2. spread the risk over the top 2 or 3. the lowest drawdown remains.

ii. Backtest

GTAA4/1: GTAA3 with GD200

GTAA4/2: GTAA3 without REITs with GD200 and Top2

Results (portfolio, final amount, annual return, maximum drawdown)

S&P500: $44.046 6.97% -50.80%

GAA: $47,143 7.30% -33.60%

GTAA1 $86.959 10.33% -29.06%

GTAA2 $102,498 11.16% -30.37%

GTAA3: $117,392 11.85% -29.16%

GTAA4/1 $218,607 15.05% -18.96%

GTAA4/2 $260,531
15.97% -14.39%

The optimized factor GTAA shows a significant increase in return with a significant decrease in risk. In comparison, the optimized GTAA model was able to increase the initial capital 26-fold, compared to the 4.4-fold increase of B&H S&P500 (see chart).

To think further: What is the optimal GTAA model - with the highest return at the lowest risk? Can the values also be transferred to the eurozone? How can we estimate the probability that the performance can also be expected in the future?

6. bonus: GTAA Max

i. Selection of top assets

Now the bonus for all return fans! How far can GTAA be exploited without increasing the risk too much? The following conditions apply: 1. everything that can be traded as ETFs in Germany is permitted. 2. all averages and momentum periods are permitted. 2. no borrowing.

The following ETFs are eligible:

ETF on 3x leveraged Nasdaq100

ETF on Bitcoin (Yes, dear Bitcoiners, nyknyc! However, the above condition applies and you may also use your favorite exchange).

ii. Backtest:

Assets: TQQQ PRIDX VUSTX ^BTC (time period 1/2015-3/2023)

Results (portfolio, final amount, annual return, maximum drawdown)

GTAA5 Top 2: $358,174 54.30% -32.36%

GTAA5 Top 3: $128,297 36.25% -19.79%

GTAA5 Top 4: $79,330 28.54% -14.60%

7. conclusion

Everyone has to decide for themselves which GTAA model is best for them: some people prefer returns, others security, others a good combination. GTAA offers something for everyone! But finding the right GTAA model to implement with ETFs is no easy task. GTAA is a process! Perhaps one or two of you have now been inspired to go on a GTAA exploration tour yourself or together? Feel free to share your insights and thoughts!

PS: Yes, I am implementing the GTAA strategy with my own money because I am convinced by the logic behind it and the backtest results. I am slowly building it up using two models, one defensive and one offensive. Within the scope of the technical possibilities on GQ, I am trying to reproduce them both as well as possible. Just have a look if you are interested (following and unfollowing is always possible).

8. links

Link 1: https://getqu.in/HTC7DCSKVZ8H/gj9PsZf4V2/

Link 2: ETF search: https://de.extraetf.com/etf-search

Link 3: https://www.portfoliovisualizer.com/

Link 4: https://www.portfoliovisualizer.com/backtest-portfolio

Link 5: https://www.portfoliovisualizer.com/test-market-timing-model?timingModel=6