- 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.
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.
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A previous study found that a dynamic asset allocation strategy with Vanguard index funds produced better returns than models with static asset allocations. Changing asset allocation according to stock-market climate produced much higher returns with less risk. TIAA-CREF’s variable annuity accounts can similarly be used to improve returns for participants. Results for three models with dynamic asset allocation are provided whose performance and risk measurements are all better than those of the variable annuity accounts alone, or static combinations of those accounts.
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Performance and risk measures are given for six iM(MAC-Vang) models with various asset allocations which use a combination of Vanguard bond- and stock-funds, and switch assets according to stock-market climate.
In continuation of our previous article “How Good are Vanguard’s LifeStrategy Funds? Much Better Returns From Vanguard Funds with iM’s (MAC-Vang)20/80” we show that exceptionally high returns can be obtained from Vanguard funds, when a dynamic asset allocation strategy is employed, and actively managed funds instead of index funds are used. Using a combination of bond-, stock-, and sector-funds in the model, and switching asset allocation according to stock-market climate, provided an annualized average return of over 15% for the backtest period Jan-2000 to Jul-2014.
“Studies have shown that your asset allocation has a bigger impact on your long-term returns than any specific fund you pick. So why not pick a Vanguard LifeStrategy Fund that has asset allocation built in?” This is the opening statement on a Vanguard web-page, which also lists other potential benefits of investing in such a fund. The historic performance of the LifeStrategy Moderate Growth Fund was analyzed from Jan-2000 onward, and it is very clear from the analysis that this was a high risk investment with low returns. An alternative investment model with Vanguard funds is proposed which would have produced much higher returns with less risk.
The TIAA Real Estate Account, despite showing good returns over the last four years, is a typical example of a fund with disappointing performance over the longer term. In order to maximize one’s returns one has to know when to enter and exit the fund. My analysis shows that TIAA Real Estate may peak in the second half of 2014 which would provide an early indication to reduce one’s exposure. A firm sell signal would arise when its 1-year rolling return moves below 0%.