Trump has once again backed semiannual reporting. What could this mean for stocks?
- iM-Vanguard Systems use a combination of Vanguard bond- and stock-funds, and switch assets according to stock-market climate.
- Backtests show that models using index funds produce better returns when a dynamic asset allocation strategy is employed (System1) than buy-and-hold.
- Higher returns can be obtained from actively managed Vanguard funds with dynamic asset allocation (System2 and System3). System3 uses only two stock funds and one intermediate-term bond fund.
Stock-market timing model
The dynamic asset allocation strategy requires that during up-market periods more money is allocated to stock funds than bond funds, and during down-market periods more money is allocated to bond funds than stock funds.
The up- and down-market periods come from our MAC-US (backtested over 65 years). From 2000 to 2014 the MAC-US signaled only 5 down-market periods and 6 up-market periods, including the current up-market period.
System1 Funds
- Total Bond Market Index Fund (VBMFX) – Vang. Risk Potential 2
- Total Stock Market Index Fund (VTSMX) – Vang. Risk Potential 4
System2 Funds
- Intermediate-Term Investment-Grade Fund (VFICX) – Vang. Risk Potential 2
- Long-Term Invest-Grade Fund (VWESX) – Vang. Risk Potential 3
- Long-Term Treasury Fund (VUSTX) – Vang. Risk Potential 3
- Selected Value Fund (VASVX) – Vang. Risk Potential 5
- Energy Fund (VGENX) – Vang. Risk Potential 5
- Health Care Fund (VGHCX) – Vang. Risk Potential 5
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System3 Funds
- Intermediate-Term Investment-Grade Fund (VFICX) – Vang. Risk Potential 2
- Dividend Growth Fund (VDIGX) – Vang. Risk Potential 4
- Health Care Fund (VGHCX) – Vang. Risk Potential 5
Risk
The Vanguard Risk Potential should provide a measure of risk for each fund. It would appear from this that:
- System1 has the lowest risk potential,
- System3 has slightly more risk potential than System1,
- System2 has the highest risk potential.
Performance
Performance for the iM-Vanguard Systems from Jan-2000 to end of Feb-2015 is shown in the tables below for various bond/stock allocations.
Only System3 out-performed S&P 500 over the last 5 years, with System2 showing the worst performance. Over a period of 10 years and longer System2 would have had the best performance.
Conclusion
Investors in Vanguard funds can achieve good returns with less risk by following a simple market timing strategy to decide on the asset allocation for their investment. A dynamic asset allocation strategy dependent on stock-market climate is the key to better returns.
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