I expanded the model 3.3 up to 21 assets with results that continue to be solid without optimization. Beginning from Summer, I think that this model will be my new one with real money (now it's the classic model 3 that you can find in this blog).
It's also ready a variant of model 3 that I'll call model 4, with same rules but completely different time frames.
The correlation between the two models is positive and high (70%), but not too much.
I'll post them in May, when I'll have free time. I am also looking for other 1-2 Etfs candidate that are quite liquid (i just need tight bid/ask not volumes), enough track record for the benchmark and low correlation with most assets. I could also try to see how some short equity Etfs work even if these models are not thought to go short.
Next week I'll post the new May allocation within the week end
Sunday, April 26, 2015
Sunday, April 12, 2015
MODEL 3.3 (Beta test) 3ETF 18 assets
I'm continuing developing a wider version of model 3.
At the moment asset correlations are increasing between stocks & bonds because of Central Banks liquidity. My target is to build a model with wider ETFs that, hopefully, will be able to resist and limit losses when the next crash will come within 1-2 years. On the other side I don't want to stay aside from markets hoping in better market metrics because often the better gains occur in the last part of the bubble (think about 1999).
This is a beta version and at the moment I'm not investing my money on this, because I always like to see it in real for at least 6 months after developed to see how it works and test if there's some formula bug in the excel file.
Basically it's the same "engine" of model 3, with these differences:
* It invests in 3 ETFs each month instead of 2
* ETF Universe is composed by 18 assets instead of 10.
All of them are listed in Italy but you can find them in other European Exchange such as Frankfurt. Just to clarify a doubt that one reader expressed to me: they are listed in Europe and are not hedged. That means that if I invest in US Equity, my performance is the sum of US Equity in local currency + $ performance vs €.
You can see the ETF universe (all Ishares) in the graph below and see how the model allocated money since 2001.
A problem I have at the moment is that many ETFs are recent and there's not enough track record to test them (or are illiquid).Therefore I find difficult to find other assets to add. For example I'd like to try some smart beta one, but is impossible at the moment.
Here is the performance of the model 3.3 on the hypothesis that I buy the benchmark index at the end of each month. Of course in practice the real performance will differ for slippage costs, bid/ask, capital gain taxes, difference between nav and price, commissions, but this is an interesting starting point in my view.
Allocations in 2015 were:
Jan Govt 15-30 / Treasury 7-10 / UK Gilts
Feb Govt 15-30 / Treasury 7-10 / UK Gilts
Mar S&P500€ / HY $ / Developed Markets Properties
Apr Govt 15-30 / Gold € / UK Gilts
This is a work in progress because I'm going to add further assets.
The next step is to add many type of Govt (different maturities such as 1-3y, 5-7y, 7-10 and 15-30 and longer if available for euro and US) and corporate bond but I need to prepare the formulas to solve some problems with correlations. It will take time, but hopefully for the Summer I'll have a model that select among 30 assets.I'm also looking for other types of ETF to add other currencies exposure but it's not easy to find something in Italy outside of $, sterling and yen.
I remind that the target of model 3 is to take its risk, also exposing to losses around 7-8% in a month in exchange to obtain interesting risk-adjusted returns over the long term (an alternative to the pure equity investing for my portfolio). Sincerely I don't believe too much in the buy&hold unless you dont' buy in recession times...but it takes good guts!
At the moment asset correlations are increasing between stocks & bonds because of Central Banks liquidity. My target is to build a model with wider ETFs that, hopefully, will be able to resist and limit losses when the next crash will come within 1-2 years. On the other side I don't want to stay aside from markets hoping in better market metrics because often the better gains occur in the last part of the bubble (think about 1999).
This is a beta version and at the moment I'm not investing my money on this, because I always like to see it in real for at least 6 months after developed to see how it works and test if there's some formula bug in the excel file.
Basically it's the same "engine" of model 3, with these differences:
* It invests in 3 ETFs each month instead of 2
* ETF Universe is composed by 18 assets instead of 10.
All of them are listed in Italy but you can find them in other European Exchange such as Frankfurt. Just to clarify a doubt that one reader expressed to me: they are listed in Europe and are not hedged. That means that if I invest in US Equity, my performance is the sum of US Equity in local currency + $ performance vs €.
You can see the ETF universe (all Ishares) in the graph below and see how the model allocated money since 2001.
A problem I have at the moment is that many ETFs are recent and there's not enough track record to test them (or are illiquid).Therefore I find difficult to find other assets to add. For example I'd like to try some smart beta one, but is impossible at the moment.
Here is the performance of the model 3.3 on the hypothesis that I buy the benchmark index at the end of each month. Of course in practice the real performance will differ for slippage costs, bid/ask, capital gain taxes, difference between nav and price, commissions, but this is an interesting starting point in my view.
Allocations in 2015 were:
Jan Govt 15-30 / Treasury 7-10 / UK Gilts
Feb Govt 15-30 / Treasury 7-10 / UK Gilts
Mar S&P500€ / HY $ / Developed Markets Properties
Apr Govt 15-30 / Gold € / UK Gilts
This is a work in progress because I'm going to add further assets.
The next step is to add many type of Govt (different maturities such as 1-3y, 5-7y, 7-10 and 15-30 and longer if available for euro and US) and corporate bond but I need to prepare the formulas to solve some problems with correlations. It will take time, but hopefully for the Summer I'll have a model that select among 30 assets.I'm also looking for other types of ETF to add other currencies exposure but it's not easy to find something in Italy outside of $, sterling and yen.
I remind that the target of model 3 is to take its risk, also exposing to losses around 7-8% in a month in exchange to obtain interesting risk-adjusted returns over the long term (an alternative to the pure equity investing for my portfolio). Sincerely I don't believe too much in the buy&hold unless you dont' buy in recession times...but it takes good guts!
Friday, April 3, 2015
April Allocation
March...what a great month!! It finished with a very good performance, even if I feared it because invested in overstretched assets. But this is the momentum power and the strength of trend follower methods. They are going to reward until.. the trend doesn't end. But who can say when it will finish? We could be in a year like 2007 with strong fall coming in equity markets in the next quarters. On the other hand with all liquidity around, we could be in a market like 1998-99, where there were huge gains even if with bubbles all around. Personally I think that there's a bubble in Euro government bond, it's insane to have negative yields. But I'll continue to surf market (and euro bonds), being conscious that at some point I'll have to take stop losses on the most recent trades.
Let's go and comment with the new allocations.
MODEL 1: it was allocated 100% on the US Equity. It closed with a gain higher than 3% thanks to currency effect. I remind you that all my strategies are elaborated by an European point of view with currency un-hedged. The new allocation for April is Euro Government 1-3years. Basically the model take profits and go conservative. If you can have a positive rate on a sight account this is the month for it. I have Conto Arancio at 1% ad I'll go on it.
MODEL 2: this model invested in US equity as well taking advantage of Dollar strength. The new allocation for April is Euro Government 15-30 years. This model is more volatile than Model 2 and finds extra performance in another stretched market.
MODEL 3: it invests in 2 ETFs each month. In March it was invested in Treasury 7-10 years and euro govies 15-30 that had both good performances in euro. In April the model confirms the euro government 15-30years, but switches from Treasuries to Gold. It's the first time since March 2014 that model invest in Gold and I must admit that it lost money in the previous two gold's allocations.
This is the table with monthly and ytd performance. It will be difficult that the 2015 will continue like in the first quarter.
Summary: all models are going to modify the asset allocation in April.
Model 1 will invest in Euro-gov 1-3 years;
Model 2 will invest in Euro-Govies 15-30 years;
Model 3 will invest in Euro-Govies 15-30years and gold.
Let's go and comment with the new allocations.
MODEL 1: it was allocated 100% on the US Equity. It closed with a gain higher than 3% thanks to currency effect. I remind you that all my strategies are elaborated by an European point of view with currency un-hedged. The new allocation for April is Euro Government 1-3years. Basically the model take profits and go conservative. If you can have a positive rate on a sight account this is the month for it. I have Conto Arancio at 1% ad I'll go on it.
MODEL 2: this model invested in US equity as well taking advantage of Dollar strength. The new allocation for April is Euro Government 15-30 years. This model is more volatile than Model 2 and finds extra performance in another stretched market.
MODEL 3: it invests in 2 ETFs each month. In March it was invested in Treasury 7-10 years and euro govies 15-30 that had both good performances in euro. In April the model confirms the euro government 15-30years, but switches from Treasuries to Gold. It's the first time since March 2014 that model invest in Gold and I must admit that it lost money in the previous two gold's allocations.
This is the table with monthly and ytd performance. It will be difficult that the 2015 will continue like in the first quarter.
Summary: all models are going to modify the asset allocation in April.
Model 1 will invest in Euro-gov 1-3 years;
Model 2 will invest in Euro-Govies 15-30 years;
Model 3 will invest in Euro-Govies 15-30years and gold.
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