Model Portfolios

Dual Momentum Strategy

Momentum Based on Average of the 6-month and 12-month Return

Dual Momentum is an active timing-based strategy, pioneered by Gary Antonacci, which uses low-cost index ETFs.

Based on historical simulated back-tests, Dual Momentum shows incredible performance results over full equity market cycles. Dual Momentum is an excellent risk-considered investment model where drawdowns have not exceeded 25% in the past 48 years of data. During the same time period, compounded returns have exceeded 16% annually*.

In Dual Momentum, the investor considers the recent performance of three large assets: U.S. stocks, International stocks, and Treasury bills. Dual Momentum is named for the steps involved in the evaluation process: Relative Momentum and Absolute Momentum.

At the end of each month, a Dual Momentum investor will go through the following simple process which takes me approximately ten minutes.

Step 1: Relative Momentum Analysis (Cross-sectional Momentum)

In the first step, the investor will evaluate the recent historical performance of the two equity assets: U.S. stocks versus International stocks.

Obtain the total returns for the past six months and the past 12 months for each asset. Average the returns for each asset by adding the past returns together and dividing by 2.

Averaged Return = [(6 month return + 12 month return)/2]

The asset with the highest averaged return based on this calculation is now the preferred equity asset.

Step 2: Absolute Momentum Analysis (Time-series Momentum)

In the second step, the investor will evaluate the recent historical performance of the previously determined preferred equity asset to the risk-free rate of return. For the purposes of this calculation, the risk-free rate of return is represented by Treasury bills.

Obtain the risk-free rate of return by averaging the current secondary market interest rate on 6 Month Treasury Bills and 1 Year Treasury bills.

Risk-free Return = [(6 Month T-bill rate + 1 Year T-bill rate)/2]

The preferred equity asset is said to have positive absolute momentum if the Averaged Return for that asset exceeds the calculated Risk-free Return.

Step 3: Determine the Dual Momentum Signal

If the preferred equity asset has positive absolute momentum, the investor invests their entire Dual Momentum portfolio into the lowest cost index fund of that asset class available to them.

If the preferred equity asset has negative absolute momentum, the investor invests their entire Dual Momentum portfolio into a low-cost bond fund. This may include a 1-5 Year Government Bond fund, a 7-10 Year Treasury Bond fund, or even a Total Bond Market fund.

Step 4: Make the Trades

More often then not, the Dual Momentum signal will be the same from month-to-month. This means the investor will not be making any trades at all.

However, on occasion the Dual Momentum signal will change compared to the signal for the previous month. If this is the case, the investor will sell their current holding and purchase the appropriate holding for the new Dual Momentum signal.

*These return and drawdown figures vary somewhat from Gary Antonacci's results with a 12-month lookback. (His backtests show a 17.7% CAGR & -17.8% max drawdown). I believe this is primarily due to Gary's better access to global bond data and using the S&P 500 instead of the MSCI USA Index.

Dual Momentum vs. Buy and Hold Indexing(2)

Dual Momentum Portfolio Statistics (1970-2017)

Compounded Annual Return:  +16.13% (48 years)
Largest Annual Gain:  +69.94% (1986)
Largest Annual Drawdown:  -8.74% (1973)
Peak to Trough Drawdown:  -22.47% (1973-1975)

Equal Weight Portfolio Statistics (1970-2017)

Compounded Annual Return:  +8.89% (48 years)
Largest Annual Gain:  +32.41% (1985)
Largest Annual Drawdown:  -27.00% (2008)
Peak to Trough Drawdown:  -37.77% (2007-2009)

Notes: The returns above use the following index data: MSCI USA Index, MSCI EAFE Index, MSCI ACWI-ex USA, FRED 6-month Secondary Market Treasury Bill, FRED 1-Year Secondary Market Treasury Bill, Shiller NYU Stern Database estimates for 10 year Treasury Bonds (until 1992), and Vanguard Intermediate Term Treasury Bond Fund data.

Investor results will differ when substitute indices are used. The data-set does not include allowances for management fees, taxes, transaction fees, and other investor costs. Past returns based on back-tests do not in any way predict future, real world results.

Leveraged Barbell Portfolios

Annually Re-balanced Portfolios with 3x Daily Leveraged Stocks & T-bills

Leveraged Barbell Portfolios are simple to manage, lazy investment style portfolios which capture the long-term advantages of daily leveraged index ETFs. When daily leveraged funds are paired with a large allocation to a super safe investment, such as T-bills or shorter-term government bonds, the results are outstanding.

Over long periods of time, Leveraged Barbell Portfolios will outperform a standard buy-and-hold index portfolio in both positive return years and through the worst downturns. This is thanks to the compounding effect. When markets are climbing, daily re-balancing on leveraged funds leads to further compounded gains in most rising market conditions. When markets are falling, the daily re-balancing causes leveraged funds to shrink at a declining rate in most falling market conditions.

A key component to Leveraged Barbell Portfolios is the large allocation to super safe assets. The majority of your portfolio should be invested in shorter-term government bonds to provide stability in falling markets and ammunition when markets turn around. These assets will also generate a moderate return, providing income to the investor. Over time that bond income, even at a 3% interest yield, will grow to be substantial.

For super safe assets, I use U.S. treasury bill data in my models because it is readily available and easy to calculate. However, a 1-5 Year Government Bond Fund or a 7-10 Year Government Bond Fund would also be very effective holdings. In my analysis, 10 Year Government Bonds would have provided an extra 0.5% to 0.8% (depending on your allocation to safe assets) to your compound annual return with somewhat more volatility.

For the leveraged equities, I use S&P 500 index data (with estimated dividends) in my models. While daily data on international equities is only available going back to the mid-2000s, the model also works well in a 3-fund portfolio. For better diversification, it would be beneficial to split the leverage equity portion equally into a 3x leveraged S&P 500 ETF (such as UPRO) and a 3x leveraged MSCI EAFE ETF (such as DZK).

40% Allocation to 3x Leveraged S&P 500 & 60% Allocation to US T-bills

Portfolio Statistics

Compounded Annual Return: +15.86% (68 years)
Largest Annual Gain: +89.91% (1954)
Largest Annual Drawdown: -32.43% (2008)
Peak to Trough Drawdown: -52.9% (2007-2009)

S&P 500 Statistics

Compounded Annual Return: +11.33% (68 years)
Largest Annual Gain: +52.56% (1954)
Largest Annual Drawdown: -36.55% (2008)
Peak to Trough Drawdown: -55.25% (2007-2009)

30% Allocation to 3x Leveraged S&P 500 & 70% Allocation to US T-bills

Portfolio Statistics

Compounded Annual Return: +13.42% (68 years)
Largest Annual Gain: +67.67% (1954)
Largest Annual Drawdown: -23.63% (2008)
Peak to Trough Drawdown: -41.16% (2007-2009)

S&P 500 Statistics

Compounded Annual Return: +11.33% (68 years)
Largest Annual Gain: +52.56% (1954)
Largest Annual Drawdown: -36.55% (2008)
Peak to Trough Drawdown: -55.25% (2007-2009)

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