Backtesting Variations of the Ivy Portfolio
Scott's Investments | Dec 19, 2011 02:25AM ET
There are several variables to mix and match when developing a simple tactical asset allocation model like those detailed in Faber's book. I used ETFReplay.com to test historical results of different variations of a 5 ETF portfolio and the results are listed below.
I began with a portfolio of 5 ETFs similar, but not identical, to the 5 ETF portfolio in Faber's book:
- AGG (iShares Barclays Aggregate Bond),
- DBC (PowerShares DB Commodity Index),
- EFA (iShares MSCI EAFE),
- VNQ (Vanguard MSCI U.S. REIT), and
- VTI (Vanguard MSCI Total U.S. Stock Market)
DBC began trading during 2006 and the tests below all began in 2005, so for all of 2005 and part of 2006 there were only 4 ETFs available in the backtest. All tests below re-balanced monthly unless otherwise noted.
6 Month Relative Strength
I first ran a test which bought the top ETF of the 5 based on which one had the strongest 6 month performance. The strategy was re-balanced monthly beginning in 2005:
Next, I ran a test which purchased the top 2 ETF based on 6 month performance:
3 Month Relative Strength
The next test was to purchase the top ETF based on the strongest 3 month performance:
And the results for buying the top 2 ETF based on 3 month performance:
6 & 3 Month Relative Strength
Next, I ran tests incorporating multiple timeframes and variables. The first test purchased the top 1 ETF based on the 6 and 3 month historical performance, with an equal weighting given to both timeframes:
Get The News You Want
Buying the top 2 ETFs of the five based on 6 and 3 month performance yielded the following returns:
Relative Strength & Volatility
The next tests incorporated both historical returns and volatility. I also use a combination of returns/volatility for my monthly ETFReplay.com portfolio. The first test bought the top ETF based on a combination of 6 month returns (40% weighting), 3 month returns (30% weighting), and 3 month volatility (30% weighting):
The same test was run purchasing the top 2 ETFs:
Finally, the last test bought the top ETF based on a combination of 3 month returns (40% weighting), 20 day returns (30% weighting), and 20 day volatility (30% weighting):
The same test with purchasing the top 2 ETFs:
If you had simply bought and held this portfolio (and re-balanced once when DBC began trading in 2006), the portfolio performed as follows:
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