tldr Variable Contrarian Asset Allocation has outperformed all X% stocks and 100-X% bond portfolios over the last 90 years
With interest rates rising and CDs and short term bond yields being competitive with longer term yields for the first time in 10 years, its seems an act of insanity to stick to a standard 70/30, 60/40 or whatever passive investment. You are taking duration and interest rate risk for very little extra yield.
It got me thinking, what if you adjusted your stock, bond, and cash allocation based on market conditions relative to history. So if stocks CAPE is high, reduce stocks. If bond interest rates are low, reduce bonds. If yields are low and short term CD/bonds are competitive(within 1% yield) switch from long term to short term CDs/bonds.
I took this idea and back tested it over the last 90 years. Unsurprising this value/contrarian based asset allocation strategy performed really well. It outperformed 100% stocks with less draw down than a 70/30 allocation.
Asset Allocation over time: https://imgur.com/a/mDreiXi
Returns: https://imgur.com/4NzfWy1
Here is the formula for how the asset allocation shifts:
Started with 70% stocks 30% bonds as a base allocation.
If CAPE ratio is:
Below 15: Add 10% Stocks
Below 10: Add 20% Stocks
Above 20: Reduce 10% Stocks
Above 30: Reduce 20% Stocks
If 10 year treasury yield is:
Below 6%: Reduce bonds 10%
Below 3%: Reduce bonds 20%
Above 8%: Add 10% Bonds
Above 12%: Add 20% Bonds
If difference between 10 year treasury and 3 month tbill is less than 1% and 10 year yield is less than 3%, switch bonds to tbills. If yields are less than 6% switch 50% of bonds to tbills
edit: added rolling 10 year returns https://imgur.com/HV7eLDu
Submitted January 23, 2019 at 08:43PM by kbrower http://bit.ly/2FNcnNg
