As of the end of January / beginning of February, my Tactical Asset Allocation (TAA) model has shifted more heavily into equities, specifically domestic equities. Looking at the sector rankings for this month, you can really see the performance shift. Now, I will remind you that this model is not for day-trading, it is for long-term holdings. The goal is to get the middle 80% of multi-month and longer trends. When the market happens to fluctuate around the moving average, there can be whipsaws. However, the idea behind trend following is you’re never sure which break will be the one that rolls for a long time.
Additionally, by weighting the holdings of better performing assets more highly, we hope to exploit the momentum and see continued better than market performance out of those same asset classes. If you’re interested in a mean-reversion strategy, one that invests in the worst performing asset classes, you’ll need to look elsewhere. However, my model does consider that as I specifically included several “value” focused ETFs, so if they are performing well, I’ll still have exposure. Listed below are the asset class performance rankings:
As you can see, Domestic Small Caps have taken the top spot, followed by Domestic Sectors (various industries and sectors within the US market, see below for the specifics) and Domestic Large Caps. Foreign equities are still on the bottom of the allocation, but are both owned as they are above their moving average signal line. For completeness, the asset class rankings are currently using an equal weighting of the 3, 6, and 12 month returns. When the markets get particularly volatile, I may remove the shortest timeframe to help eliminate the noise that comes from the average changing direction and magnitude too quickly.
I know it sounds odd, but performance of these type of trend-following systems actually improve in volatile markets when you take a longer-term approach, which is counter-intuitive to what you would think you should do, trying to act even quicker. Just take your time, as they say, opportunities are made up far easier than loses. The specific holdings for my February portfolio are:
VB gets a 10% total portfolio weighting, and the Domestic sectors are fairly defensive with holdings of Bio-Technology, Healthcare, and Consumer Discretionary.
Personally, I feel the market is a bit over-bought here, and some of my cycle work suggests we are due for a pullback, but I’ve also learned that I need to trust the system, and simply follow the signals. Best of luck to you in the upcoming investment month. I’ll also post the results of this month’s holdings at the end of the month compared to the S&P 500 which I use for my benchmark.
Readers, how have your portfolios changed recently? Are you adding, holding, or reducing exposure to equities? Foreign or Domestic?