MODEL 3 - I WANT MY RISK

This is my third model, the one I appreciate most as an alternative to the pure B&H equity allocation.
I think  it can deliver more consistently in the long term, reducing the "ruin risk" (excluding one black swan event that can happen suddenly every moment).

Basically MODEL 3 invests in the same 10 ETF of MODEL 2 with a different approach.

1. Dax
2. Emerging Bond in $ 
3. Euro inflation bonds
4. Euro govt 1-3 years
5. US Equity
6. Ftsemib
7. HY Euro corp bond
8. Gold 
9. Treasury 7-10 years
10. Euro govt 15-30 years

All asset return are calculated from an € investor point of view (me) and ETFs reflect both asset performance and currency effect. To simplify the calculation I used the benchmark value (total return index).

At the end of each month the model allocate on 2 ETFs (the first and second in the rank), adding more diversification than MODEL 1 & 2.
The chart below shows how the model selected its allocation among all ETFs since 2001 . I appreciate a lot this model because I think is quite flexible and reactive to the events.
I also noted that with 2 ETFs I have much more consistent results instead of just one, even if commissions arise of course. Is not uncommon to see in one month ranking 1 etf dropping, while ranking 2 rising or viceversa.

The table shows annual results. Of course in real they will differ because you have commissions and slippage, as you won't always be able to get the perfect entry price. Moreover there's the market maker bid/ask and you'll pay taxes on capital gains reducing the benefits of coumpounding returns. But I think that in the good years you'll be rewarded regardless.

In the chart below you can see the gross performance over time.
I want point to two factors:
1) MODEL is not hyper-optimazed, because I want it real.
2) THE IMPORTANCE OF "FAITH".


As you can see you have some bad periods even if the the Yearly return table everything looks nicer. You can have long periods of flat/negative returns (2002 to part 2003 & 2006 to middle 2008) and also some bad corrections with consecutive negative monthly returns.
Because of this, faith in your model is essential and you must continue to follow it.

As I wrote in my introduction, investment is like agriculture. You have good and bad years (you don't know earlier, you can only suppose and/or hope) and you must follow a method that: a) rewards in good years; b) limit losses in the bad one.
Nobody knows how 2015 will be, many assets are quite overextended (especially in the fixed income) and could be a year either as 1999 (stock bubble foam building up...) or 2008 (crash).  This week SNB's move shows that 2015 isn't a normal year.
I believe that approaching it with an active model, fast to react to changing developments will be the best choice.


In Summary: this is my favourite model for an higher risk taking part of portfolio and is not hyperoptimized.
It selects 2 ETFs each month in a 10 ETFs'universe. 
Even if it had its bad years, it delivers consistent returns in the long term.
NOTE: allocation for January: A) 50% Treasury 7-10years B) 50% Euro Govt 15-30 years


I plan to build over 2015 an evolution of this model that can choose among 30-40 assets, but it's still at an embryonic state (it will take months...like a baby)