On My Radar: Three-Way Asset Strategy (Stocks, Bonds and Gold)
The concept here is simple and often simple is best. The red line shows the performance from 1968 to present when holding the asset classes (S&P 500, long-term bonds and gold) when the 3-month moving average is above its 10-month moving average. It shows how a simple three-way model can do well against the stock market as represented by the Standard and Poor’s 500 Total Return Index.
Here is how it works:
- The concept is to stay fully invested in any of the three assets provided each asset’s 3-month MA is above its 10-month MA.
- If, for example, gold is the only asset with its 3-month above its 10-month, then the model will be 100% long gold. If stocks and bonds, than 50% is positioned in each. If all three are in a positive up trend, than 1/3rd is allocated to each.
- It’s that simple. The model’s returns are better and much less volatile than the S&P itself.
The assets used in the Three-Way Asset Strategy are the S&P 500 Total Return Index for stocks, Barclays Capital Long-Term Treasury Total Return Index for bonds, and Gold Spot for gold.
Source: NDR – thank you for doing great work. Also, a special thank you to Meb Faber for sending me the NDR chart.
Some advisors might consider a strategy such as this as a core holding within a portfolio. My intent today is to show how consistently price momentum can be used to help mitigate loss and when combined together with other types of strategies, may further enhance return and reduce risk. It’s about risk mitigation in a way that allows the power of compound interest to work its magic over time.
Now, if you are more of a speculator and less of an investor, forget what I’m saying and find yourself highly concentrated bets. My two cents on speculative bets: short yen – long dollar (for now), Japanese stocks (currency hedged), short European Banks (a coming sovereign debt crisis), short high yield bonds (soon –default crisis). But venture forward at great risk. While I have conviction, some or all of these bets could be wrong or at least look wrong for a long time before they might prove correct. How long was the short sub-prime bet wrong before it turned right?
There is investing and there is betting. Investing is about combining a number of probable investment processes and diverse risks, speculating is going after the big bets. It’s one path or the other. Personally, I favor investing and the power of compound interest over time.
See the full story and important disclosures at On My Radar: Three-Way Asset Strategy.