Testing Decision Moose Asset Allocation Strategies

Decision Moose is a proprietary asset allocation and market timing signal provided to internet users for free.  The model has historical trades dating to August 1996.  The site has also been independently reviewed by CXO and the historical returns for Decision Moose is impressive.   Perhaps the most impressive aspect of Decision Moose besides its historical results are the low turnover - the model is updated/checked weekly, but trades in 2010 totaled 7 and this year there have only been 3 trades.

The model makes its investment decisions based on asset class momentum, monetary policy, and overall market indicators.  The model is long-only and invests 100% of its capital to one fund at a time.  It evaluates nine index funds to determine which one to invest in, with the nine funds listed below:

Cash or Money Market Fund (3 month Treasury)
Long-term zero-coupon Treasury bonds (BTTRX)
Large cap US stocks (SPY)
Small cap US stocks (IWM)
Gold Bullion (GLD)
Europe 350 stocks (IEV)
Latin America 40 stocks (ILF)
Japan stocks (EWJ)
Pacific ex-Japan stocks (EPP)

The current holding as of 11/18/11 is Long Treasury Bonds (BTTRX).

I decided to to look at this portfolio using just relative strength.  This is not an attempt to unveil or decode Decision Moose's proprietary model since I am making no consideration for monetary conditions or other market indicators.   Rather, I wanted to see how a strictly momentum based model of the Moose portfolio performed historically.

ETF Replay was used to test the portfolio in a variety of manners. I had to make two adjustments to the portfolio in order to backtest the portfolio - TLT was substituted for BTTRX and SHY was substituted for 3 month treasuries.  Another limitation to this test is GLD did not begin trading until 2004 - Decision Moose used a closed-end fund, ASA, for gold prior to GLD's inception. ASA is not in ETF Replay's historical database.

First, I tested the portfolio to 2003 using the 6 month relative performance to determine a single holding and rebalanced monthly.  The results are below:





The current holding using 6 month relative strength is TLT.

If we perform the same exact test using 3 month relative strength, holding the top fund and re-balancing monthly performed as follows:




The current holding using the 3 month relative strength signal is TLT.

Next, if we test a strategy using the 6 month returns weighted 40%, 3 month returns weighted 30%, and 3 month volatility weighted at 30% (I refer to this as "6/3/3"), the Moose Portfolio performance is below.  For more background on how this "6/3/3" strategy works, I provide background on my Internet Portfolio which I update and track monthly for free on Scott's Investments:




The volatility is lower in this test and the equity curve shows less peaks and valleys than the first two tests.  TLT is also the current holding in this strategy.

Finally,  if we test a strategy using the 3 month returns weighted 40%, 20 month returns weighted 30%, and 20 month volatility weighted at 30% ("3/20/20"), the Moose Portfolio performs as follows:




The 3/20/20 strategy has stalled somewhat in the past 2 years but still shows impressive returns at lower volatility compared to SPY.  It is evident from all four strategies and Decision Moose that long-term treasuries, at least for the time being, is the asset-class showing favorable risk/return.

The full trade history of the 6/3/3 strategy is below:


The 3/20/20 strategy has stalled somewhat in the past 2 years but still shows impressive returns at lower volatility compared to SPY.  It is evident from all four strategies and Decision Moose that long-term treasuries, at least for the time being, is the asset-class showing favorable risk/return.

Start Date     End Date     Portfolio     Return         Bench Return
12/31/02     01/31/03     ILF         -4.54%         -2.46%
01/31/03     02/28/03     TLT         3.10%         -1.35%
02/28/03     03/31/03     TLT         -1.36%         0.21%
03/31/03     04/30/03     EPP         4.16%         8.46%
04/30/03     05/30/03     ILF         3.69%         5.48%
05/30/03     06/30/03     ILF         2.78%         1.07%
06/30/03     07/31/03     ILF         3.44%         1.80%
07/31/03     08/29/03     ILF         4.72%         2.06%
08/29/03     09/30/03     EPP         3.84%         -1.09%
09/30/03     10/31/03     ILF         6.01%         5.35%
10/31/03     11/28/03     EPP         -0.80%         1.09%
11/28/03     12/31/03     ILF         10.86%         5.03%
12/31/03     01/30/04     ILF         -0.53%         1.98%
01/30/04     02/27/04     IEV         3.31%         1.36%
02/27/04     03/31/04     EPP         -0.32%         -1.32%
03/31/04     04/30/04     EWJ         -6.71%         -1.89%
04/30/04     05/28/04     IEV         1.98%         1.71%
05/28/04     06/30/04     EWJ         6.31%         1.85%
06/30/04     07/30/04     IEV         -3.79%         -3.22%
07/30/04     08/31/04     TLT         4.16%         0.24%
08/31/04     09/30/04     TLT         0.95%         1.00%
09/30/04     10/29/04     ILF         2.37%         1.29%
10/29/04     11/30/04     EPP         7.29%         4.45%
11/30/04     12/31/04     EPP         4.20%         3.02%
12/31/04     01/31/05     EPP         -0.47%         -2.24%
01/31/05     02/28/05     EPP         4.22%         2.09%
02/28/05     03/31/05     EPP         -3.69%         -1.83%
03/31/05     04/29/05     EPP         0.77%         -1.87%
04/29/05     05/31/05     TLT         3.14%         3.22%
05/31/05     06/30/05     TLT         2.16%         0.15%
06/30/05     07/29/05     TLT         -3.38%         3.83%
07/29/05     08/31/05     SPY         -0.94%         -0.94%
08/31/05     09/30/05     ILF         15.62%         0.80%
09/30/05     10/31/05     ILF         -4.16%         -2.37%
10/31/05     11/30/05     EWJ         2.89%         4.40%
11/30/05     12/30/05     ILF         1.24%         -0.19%
12/30/05     01/31/06     EWJ         3.70%         2.40%
01/31/06     02/28/06     ILF         -1.07%         0.57%
02/28/06     03/31/06     ILF         -1.81%         1.65%
03/31/06     04/28/06     GLD         12.03%         1.26%
04/28/06     05/31/06     GLD         -1.32%         -3.01%
05/31/06     06/30/06     IEV         0.72%         0.26%
06/30/06     07/31/06     IEV         1.97%         0.45%
07/31/06     08/31/06     SHY         0.75%         2.18%
08/31/06     09/29/06     IEV         0.67%         2.70%
09/29/06     10/31/06     TLT         0.85%         3.15%
10/31/06     11/30/06     SPY         1.99%         1.99%
11/30/06     12/29/06     EPP         4.41%         1.33%
12/29/06     01/31/07     EPP         1.57%         1.50%
01/31/07     02/28/07     EPP         0.63%         -1.96%
02/28/07     03/30/07     EPP         4.95%         1.16%
03/30/07     04/30/07     EPP         3.90%         4.43%
04/30/07     05/31/07     EPP         3.09%         3.39%
05/31/07     06/29/07     ILF         1.39%         -1.46%
06/29/07     07/31/07     ILF         0.57%         -3.13%
07/31/07     08/31/07     SHY         1.05%         1.28%
08/31/07     09/28/07     SHY         0.55%         3.87%
09/28/07     10/31/07     GLD         6.95%         1.36%
10/31/07     11/30/07     GLD         -1.65%         -3.87%
11/30/07     12/31/07     GLD         6.65%         -1.13%
12/31/07     01/31/08     TLT         2.10%         -6.05%
01/31/08     02/29/08     GLD         5.23%         -2.58%
02/29/08     03/31/08     GLD         -6.00%         -0.90%
03/31/08     04/30/08     GLD         -4.16%         4.77%
04/30/08     05/30/08     ILF         8.70%         1.51%
05/30/08     06/30/08     ILF         -7.61%         -8.35%
06/30/08     07/31/08     SHY         0.43%         -0.90%
07/31/08     08/29/08     SHY         0.47%         1.55%
08/29/08     09/30/08     TLT         1.47%         -9.44%
09/30/08     10/31/08     TLT         -1.86%         -16.52%
10/31/08     11/28/08     SHY         1.10%         -6.96%
11/28/08     12/31/08     TLT         13.64%         0.98%
12/31/08     01/30/09     TLT         -13.07%     -8.21%
01/30/09     02/27/09     TLT         -1.54%         -10.74%
02/27/09     03/31/09     GLD         -2.54%         8.35%
03/31/09     04/30/09     SHY         -0.16%         9.93%
04/30/09     05/29/09     EPP         15.48%         5.85%
05/29/09     06/30/09     ILF         -2.45%         -0.07%
06/30/09     07/31/09     ILF         8.46%         7.46%
07/31/09     08/31/09     EPP         3.53%         3.69%
08/31/09     09/30/09     EPP         9.69%         3.55%
09/30/09     10/30/09     EPP         -2.32%         -1.92%
10/30/09     11/30/09     GLD         12.79%         6.16%
11/30/09     12/31/09     GLD         -7.20%         1.91%
12/31/09     01/29/10     ILF         -10.82%     -3.63%
01/29/10     02/26/10     GLD         3.27%         3.12%
02/26/10     03/31/10     SPY         6.09%         6.09%
03/31/10     04/30/10     IWM         5.67%         1.55%
04/30/10     05/28/10     IWM         -7.54%         -7.95%
05/28/10     06/30/10     TLT         5.80%         -5.17%
06/30/10     07/30/10     TLT         -0.95%         6.83%
07/30/10     08/31/10     TLT         8.40%         -4.50%
08/31/10     09/30/10     TLT         -2.51%         8.96%
09/30/10     10/29/10     GLD         3.68%         3.82%
10/29/10     11/30/10     GLD         2.11%         0.00%
11/30/10     12/31/10     GLD         2.44%         6.68%
12/31/10     01/31/11     IWM         -0.37%         2.33%
01/31/11     02/28/11     IWM         5.54%         3.47%
02/28/11     03/31/11     SPY         0.01%         0.01%
03/31/11     04/29/11     SPY         2.90%         2.90%
04/29/11     05/31/11     GLD         -1.79%         -1.12%
05/31/11     06/30/11     GLD         -2.43%         -1.69%
06/30/11     07/29/11     GLD         8.42%         -2.00%
07/29/11     08/31/11     GLD         12.27%         -5.50%
08/31/11     09/30/11     GLD         -11.06%     -6.94%
09/30/11     10/31/11     TLT         -3.84%         10.91%
10/31/11     11/21/11     TLT         3.86%         -4.65%

For those interested in the history of Decision Moose trades, the full history is below:


   DATE                          ACTION                                PORTFOLIO
 LATEST            HOLD Long Bonds (BTTRX)                  $1,053,280 
 09.30.2011      Switch to Long Bonds (BTTRX)             $1,063,946 
 09.23.2011      Switch to Cash (3moT)                        $1,063,944 
 04.29.2011      Switch to Gold (GLD)                            $1,014,475 
 12.03.2010      Switch to US Small-cap Equities (IWM)   $888,590 
 11.26.2010      Switch to Cash (3moT)                       $888,568 
 10.15.2010      Switch to Pacific ex-Japan (EPP)         $925,500 
 07.02.2010      Switch to Long Bonds (BTTRX)             $880,370 
 05.07.2010      Switch to Gold (GLD)                           $878,736 
 03.05.2010      Switch to US Small-cap Equities (IWM)   $895,676 
 01.22.2010      Switch to Cash (3moT)                      $895,572 
 11.06.2009      Switch to Latin American Equities (ILF)   $932,139 
 10.30.2009      Switch to Cash (3moT)                      $932,131 
 10.16.2009      Switch to Latin American Equities (ILF) $1,013,505 
 07.24.2009      Switch to Pacific ex-Japan (EPP)         $817,451 
 04.10.2009      Switch to Cash (3moT)                    $817,082 
 02.06.2009      Switch to Gold (GLD)                      $848,133 
 11.28.2008      Switch to Long Bonds (BTTRX)         $904,527 
 09.26.2008      Switch to Cash (3moT)                  $903,981 
 08.29.2008      Switch to Long Bonds (BTTRX)        $902,582 
 03.21.2008      Switch to Cash (3moT)                 $896,170
 11.23.2007      Switch to Gold (GLD)                     $809,853
 11.09.2007      Switch to Cash (3moT)                  $808,852
 10.05.2007      Switch to Latin American Equities (ILF)     $807,409
 08.10.2007      Switch to Cash (3moT)                  $802,658
 04.13.2007      Switch to Latin American Equities (ILF)   $747,629
 03.09.2007      Switch to Pacific ex-Japan (EPP)          $672,465
 03.02.2007      Switch to Cash (3moT)                     $671,826
 11.03.2006      Switch to Latin American Equities (ILF)    $645,352
 08.18.2006      Switch to European Equities (IEV)         $615,174
 06.09.2006      Switch to Cash (3moT)                    $609,415
 04.07.2006      Switch to Gold Bullion (GLD)              $590,664
 01.27.2006      Switch to Latin American Equities (ILF)      $586,785
 12.30.2005      Switch to Japan Equity Index (EWJ)         $561,056
 11.05.2005      Switch to Latin American Equities (ILF)         $537,307
 10.07.2005      Switch to Cash (3moT)                      $535,744
 08.26.2005      Switch to Long Bonds (BTTRX)              $552,712
 08.05.2005      Switch to Cash (3moT)                       $551,615
 06.17.2005      Switch to Latin American Equities (ILF)   $508,790
 05.20.2005      Switch to Long Bonds (BTTRX)             $501,161
 03.24.2005      Switch to Cash (3moT)                       $499,023
 11.12.2004      Switch to Latin American Equities (ILF)   $446,568
 08.06.2004      Switch to Long Bonds (BTTRX)             $423,727
 03.26.2004      Switch to Cash (3moT)                      $421,967 
 01.10.2004      Switch to Long Bonds (BTTRX)             $396,007
 01.03.2004      Switch to Cash (3moT)                      $395,943
 07.19.2003      Switch to Asian Equities (SAF)              $270,011 
 02.08.2003      Switch to Long Bonds (BTTRX)             $264,386 
 01.04.2003      Switch to Gold Shares (ASA)               $278,513 
 06.15.2002      Switch to Long Bonds (BTTRX)             $251,855 
 06.01.2002      Switch to Cash (3moT)                    $251,685 
 11.24.2001      Switch to Gold Shares (ASA)              $129,198 
 07.28.2001      Switch to Long Bonds (BTTRX)             $127,541 
 01.27.2001      Switch to Gold Shares (ASA)             $117,381 
 05.07.2000      Switch to Long Bonds (BTTRX)             $100,000 

     ETFs Replace Mutual Funds    

 05.07.2000      Close Invesco Europe                  $275,417
 01.21.2000      Switch to Invesco Europe             $266,459
 07.08.1999      Switch to Invesco Pacific              $214,552
 04.23.1999      Switch to Invesco Latin America     $207,312
 11.13.1998      Switch to Schwab S&P Index          $173,557
 08.02.1998      Switch to Long Bonds (BTTRX)       $167,647
 03.06.1998      Switch to Invesco Europe              $150,516
 11.07.1997      Switch to Schwab S&P Index           $135,842
 08.15.1997      Switch to Schwab Small Cap Index   $126,667
 07.25.1997      Switch to Schwab S&P Index            $131,642
 02.21.1997      Switch to Invesco Latin America         $113,804
 12.27.1996      Switch to Schwab S&P Index             $107,364
 11.15.1996      Switch to Long Bonds (BTTRX)          $108,242
 10.04.1996      Switch to Schwab S&P Index            $102,881
 08.30.1996      Buy Invesco Latin America             $100,000