The timing model I published in 2006 can be found here complete with 2008 updates:
FAQ follows at the end of the post.
Charts below from the good folks at RightWayCharts:
US 10 YEAR GOVERNMENT BONDS
Frequently Asked Questions
I try to be as open and honest about the benefits as well as the drawbacks of every strategy and approach I research.
Of utmost importance is finding an asset management program and process that is right for you.
The timing model was published only as a simple example. There are considerable improvements that can be made to the model and we do not run client funds with the exact parameters in the white paper or book.
Below are the most commonly asked questions I receive via email. If you have any more questions, please email me at [email protected] with subject line FAQ:
1. How do you update this model? What do you mean by “monthly price”?
The model, as published, is only updated once a month on the last day of the month. Market action in the meantime is ignored. The published model was only meant to be broadly representative of the performance one could expect from such a simple system.
2. Have you examined an all-in version where you invest 100% of the assets in whatever asset classes are on a buy signal?
Yes, but this eliminates the benefits of diversification and exposes the portfolio to large risks when only a few asset classes are on a buy signal. In addition, it introduces unnecessary transaction costs. Returns are higher but with an unnecessary increase in risk.
3. Have you examined a long-short version where you short the asset class rather than moving to cash?
Yes. The results are in the book’s appendix.
4. Do you rebalance the asset classes monthly?
Yes. Although we show in the book that it is important to rebalance sometime, the frequency is not that important. We recommend a yearly rebalance in tax-exempt accounts, and rebalancing based on cash flows in taxable accounts.
5. Have you tried various moving averages?
Yes. There is broad parameter stability from 3 months on out to over 12 months. Ditto for EMAs.
6. I like the strategy and want to implement it, should I wait until the next rebalance?
We usually invest immediately at the rebalance point. While this can have a significant effect on short term results, it should be a wash in the long term. Investors worried about the short term can stagger their purchases over a number of months or quarters.
7. Where can I track the strategy?
8. What about using daily or weekly data? Doesn’t only updating monthly expose an investor to dramatic price movements in the interim?
We have seen confirming data for various timeframes, some superior, some inferior. Your question is valid, but also consider the opposite. What happens to a system that updates daily where a market goes down fast, then reverses and goes straight back up? The investor would have been whipshawed and lost capital.
9. What is the best way for an individual to implement the leveraged model?
This is tricky. Ideally, they can use leverage at a reasonable margin rate. Interactive Brokers is consistently fair here. Using levered ETFs is a horrible idea. For investors familiar with the product, futures are a good choice. One can also use a all-in cross market rotation system.
10. Have you ever considered combining the timing and rotation systems?
11. Why are you taking credit for using the 200-day moving average model?
We’re not, and we are very upfront that trendfollowing style models have been around for a long time.
12. For the rotation system you’ve written about where you purchase the top performer over the past 3, 6, 12 month periods, are you simply using the mean of the 3, 6, 12 month performance to calculate the top performer?
13. Is the 10 month sma crossover optimized for all (five) asset classes, or is it possible that different timeframes could work better for different asset classes?
Different timeframes will certainly work better (in the past), but there is broad parameter stability across many different moving average lengths.
14. Have you ever tried adding gold to your model (or any other asset class)?
Yes, we use over 50 asset classes at Cambria – the paper is meant to be instructive.
15. Why did you choose the 10-month SMA?
Just to be representative of the strategy, and it also corresponds closest to the 200 day moving average. We chose monthly since daily data does not go back that far for many of the asset classes.
16. Where did you get your historical data?
Global Financial Data.
17. What software did you use to perform the historical backtests?
18. Sometimes you mention using BND or AGG instead of IEF. Why is that?
We mention in the book that timing the lower volatility bonds does not make a lot of difference (higher vol bonds like corporates, emerging, and junk work well however). We mention that an investor could buy and hold a bond index like AGG or BND rather than timing IEF.
19. I am trying to replicate your results with X (Yahoo, Google, etc) database and my results don’t match. What gives?
The indexes disclosed in the paper and book are obtained from Global Financial Data. I cannot fact check all of the data sources to see how they calculate their numbers but make certain that the numbers are total return including dividends and income. For Yahoo Finance one needs to use the adjusted numbers – AND make sure to adjust them every month (or record the new returns for that month), a tedious process.