Trend-following¶

Intro¶

Putting 100% of your portfolio in stocks is usually not wise. Although the long-term trend is up, there are occasional sharp drawdowns (in 2001, 2008). A wise thing to do is to diversify portfolio in different asset classes (stocks, bonds, commodities, REITs).

This is a concept similar to what CTAs (Commodity Trading Advisors) have been doing for decades already. At present it is probably more popular under a Global Tactical Asset Allocation (GTAA).

The concept is simple:

• All the asset classes are added to the portfolio inversely proportionally to their risk (risk-parity), so that each asset contributes the equal amount of risk into portfolio.
• You do not hold all the assets at all times. Each asset’s weight is either what we have from point 1 (risk parity weight), or 0. This depends whether the asset is trending up or not.

To use a GTAA concept, you have to choose GTAA in the Universe selection section (which is only available for PAID ACCOUNT).

Let us have a look at the efficiency of using simple moving average filter for each asset class.

In the following graphs, there is a comparison of an asset class with the 12-month moving average applied to the class. In all cases the drawdowns are visually smaller, although the absolute return does not always have to beat the original asset.

S&P 500 Index¶

MSCI Europe, Australasia and Far East Index¶

10-year US Treasuries¶

Investment Grade Bond Index¶

Goldman Sachs Commodity Index¶

Gold Spot¶

REITs Index¶

In the following graphs, there is a comparison of an asset class with the 12-month moving average applied to the class. In all cases the drawdowns are visually smaller, although the absolute return does not always have to beat the original asset.

Aggregate Portfolio vs. S&P 500 Index¶