Vanguard Funds With Dynamic Asset Allocation: Three iM-Vanguard Systems

  • iM-Vanguard Systems use a combination of Vanguard bond- and stock-funds, and switch assets according to stock-market climate.
  • Backtests show that models using index funds produce better returns when a dynamic asset allocation strategy is employed (System1) than buy-and-hold.
  • Higher returns can be obtained from actively managed Vanguard funds with dynamic asset allocation (System2 and System3). System3 uses only two stock funds and one intermediate-term bond fund.

Stock-market timing model

The dynamic asset allocation strategy requires that during up-market periods more money is allocated to stock funds than bond funds, and during down-market periods more money is allocated to bond funds than stock funds.

The up- and down-market periods come from our MAC-US (backtested over 65 years). From 2000 to 2014 the MAC-US signaled only 5 down-market periods and 6 up-market periods, including the current up-market period.

System1 Funds

  1. Total Bond Market Index Fund (VBMFX) – Vang. Risk Potential 2
  2. Total Stock Market Index Fund (VTSMX) – Vang. Risk Potential 4

System2 Funds

  1. Intermediate-Term Investment-Grade Fund (VFICX) – Vang. Risk Potential 2
  2. Long-Term Invest-Grade Fund (VWESX) – Vang. Risk Potential 3
  3. Long-Term Treasury Fund (VUSTX) – Vang. Risk Potential 3
  4. Selected Value Fund (VASVX) – Vang. Risk Potential 5
  5. Energy Fund (VGENX) – Vang. Risk Potential 5
  6. Health Care Fund (VGHCX) – Vang. Risk Potential 5

System3 Funds

  1. Intermediate-Term Investment-Grade Fund (VFICX) – Vang. Risk Potential 2
  2. Dividend Growth Fund (VDIGX) – Vang. Risk Potential 4
  3. Health Care Fund (VGHCX) – Vang. Risk Potential 5

Risk

The Vanguard Risk Potential should provide a measure of risk for each fund. It would appear from this that:

  • System1 has the lowest risk potential,
  • System3 has slightly more risk potential than System1,
  • System2 has the highest risk potential.

Performance

Performance for the iM-Vanguard Systems from Jan-2000 to end of Feb-2015 is shown in the tables below for various bond/stock allocations.

Only System3 20/80 out-performed SPY over the lat 3 years, with System2 showing the worst performance. Over a period of 10 years and longer System2 would have had the best performance.

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Conclusion

Investors in Vanguard funds can achieve good returns with less risk by following a simple market timing strategy to decide on the asset allocation for their investment. A dynamic asset allocation strategy dependent on stock-market climate is the key to better returns.

Following the iM-Vanguard Systems with dynamic asset allocation

Monthly updates of asset allocation and performance for all Vanguard Systems are posted on our website.

 

 

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2 comments on “Vanguard Funds With Dynamic Asset Allocation: Three iM-Vanguard Systems
  1. andrzej says:

    Can I apply this system for ETFs (e.g. VTV, VDE, VHT) instead of the Vanguard mutual funds? If not what you can use ETFs?

    I think many subscribers would be interested to use Vanguard ETFs

    • geovrba says:

      Yes, one can use representative ETFs instead of mutual funds. Reason we used mutual funds is that there is historic data available for a longer period for them than for corresponding ETFs.

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