Market Map Model 2 : Enhancing Returns With Bonds

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 |  Includes: TLT
by: Market Map

In previous articles, we looked at the objectives, components and risk profiles of the Market Map model. In this article we add two options to Model #1: 1) a strategic allocation of assets towards Long-term treasuries during "cash" allocation periods (using the iShares 20+ Year Treasury Bond ETF (NYSEARCA:TLT) or the Vanguard Long-Term Treasury Fund Investor Shares (MUTF:VUSTX)) and 2) a two stage asset allocation towards equities during qualifying periods of significant market underperformance (component #5 in the first article).

Option #1 employs a trend identifier for positioning into bonds.

Option #2 was designed with the intention of alleviating behavioral biases that can occur when committing a single, full 100% allocation instance towards equities during significant market downtrend scenarios. Instead, when in the throes of these scenarios, equity allocation is committed in two 50% increments.

Market Map model 2 Historical Table vs. S&P 500 (dividends excluded)

*Bond returns shown reflect 75% allocation. Allocation level can vary depending on each individual's risk tolerance

Historical Bond pricing used TLT, VUSTX, and 30 year Long bond rate

Position Model 2 Model 2 Model 2 S&P 500
equity bond cash allocation dates % return $1 compound $1 compound

Bond allocation =

75%

per period Buy & Hold
$1 $1
S&P 500 12/31/1923 43.5% 1.4 1.4
cash 01/19/1926 2.0% 1.5 1.5
S&P 500 10/01/1926 4.9% 1.5 1.6
cash 01/18/1927 2.0% 1.6 2.8
S&P 500 12/31/1928 13.8% 1.8 3.2
cash 07/05/1929 4.0% 1.9 0.7
50% S&P 500 #1 04/18/1932 219.6% 5.9 2.0
50% S&P 500 #2 06/13/1932
cash 01/22/1937 3.0% 6.1 1.1
50% S&P 500 #1 04/04/1938 17.1% 7.2 1.4
50% S&P 500 #2 09/26/1938
cash 02/03/1939 2.0% 7.3 1.4
S&P 500 12/29/1939 -3.2% 7.1 1.4
cash 01/19/1940 2.0% 7.2 1.2
50% S&P 500 #1 02/10/1941 87.8% 13.5 2.1
50% S&P 500 #2 04/28/1941
BOND 07/08/1946 -4.6% 12.9 3.5
S&P 500 10/01/1946 0.7% 13.0 1.7
cash 12/31/1946 0.5% 13.1 1.6
50% S&P 500 #1 04/28/1947 84.5% 24.1 3.0
50% S&P 500 #2 05/26/1947
cash 01/30/1953 2.0% 24.6 2.8
S&P 500 12/31/1953 74.2% 42.8 4.9
cash 01/20/1956 1.0% 43.2 5.3
S&P 500 12/31/1956 -4.4% 41.3 5.1
cash 02/01/1957 1.5% 41.9 4.9
S&P 500 05/01/1958 32.2% 55.5 6.5
cash 01/22/1960 1.0% 56.0 6.6
BOND 07/05/1960 2.0% 57.1 6.7
cash 10/01/1960 0.5% 57.4
S&P 500 12/31/1960 18.3% 67.9 7.79
cash 01/19/1962 1.0% 68.6 6.37
S&P 500 09/28/1962 54.1% 106 9.82
cash 01/22/1965 1.0% 107 10.5
S&P 500 12/31/1965 1.5% 108 10.6
cash 01/21/1966 1.0% 109 8.67
S&P 500 09/30/1966 12.4% 123 9.75
cash 12/30/1966 0.0% 123 9.89
S&P 500 02/03/1967 5.6% 130 10.5
cash 02/02/1968 1.0% 131 11.8
S&P 500 12/31/1968 -1.7% 129 11.6
cash 01/17/1969 1.0% 130 10.4
S&P 500 12/31/1969 -1.2% 129 10.3
cash 01/16/1970 1.0% 130 9.64
S&P 500 10/01/1970 39.5% 181 13.5
cash 01/19/1973 1.0% 183 11.1
S&P 500 12/31/1973 -2.0% 179 10.8
cash 01/18/1974 2.0% 183 7.36
S&P 500 10/01/1974 5.5% 193 7.76
cash 12/31/1974 2.0% 197 9.4
S&P 500 03/01/1975 24.3% 244 11.7
cash 01/21/1977 2.0% 249 11
S&P 500 12/30/1977 -5.5% 236 10
cash 01/20/1978 1.0% 238 12
S&P 500 09/28/1978 31.4% 313 15
cash 01/16/1981 2.0% 319 14
S&P 500 12/31/1981 -5.8% 301 13
cash 01/22/1982 1.0% 304 14
BOND 09/03/1982 4.1% 316 14
S&P 500 10/01/1982 36.2% 431 15
cash 01/20/1984 2.0% 439 19
S&P 500 12/31/1984 84.4% 810 19
cash 07/10/1987 2.0% 826 35
50% S&P 500 #1 05/23/1988 28.9% 1066 29
50% S&P 500 #2 07/01/1988 38
cash 01/19/1990 1.0% 1076 35
S&P 500 09/28/1990 35.5% 1458 47
BOND 07/10/1992 2.4% 1493 49
cash 10/02/1992 0.5% 1501 47
S&P 500 12/31/1992 110.4% 3157 49
BOND 07/11/1997 5.0% 3313 104
cash 10/02/1997 0.5% 3330 110
S&P 500 12/31/1997 -1.0% 3298 109
cash 01/16/1998 1.0% 3331 113
BOND 07/02/1998 7.3% 3573 121
S&P 500 10/02/1998 40.0% 5003 129
BOND 07/09/1999 1.1% 5059 159
cash 10/02/1999 1.1% 5115 157
S&P 500 12/31/1999 -1.9% 5017 166
cash 01/21/2000 2.5% 5143 163
BOND 07/06/2000 2.6% 5274 168
cash 09/28/2000 1.0% 5327 157
BOND 07/06/2001 5.6% 5626 136
cash 09/29/2001 1.0% 5683 118
BOND 07/05/2002 11.9% 6360 103
S&P 500 10/04/2002 10.0% 6995 100
cash 12/31/2002 0.0% 6995 101
50% S&P 500 #1 02/03/2003 50.7% 10544 94
50% S&P 500 #2 05/02/2003
cash 01/18/2008 1.0% 10649 156
BOND 07/03/2008 3.4% 11009 142
cash 10/03/2008 1.0% 11119 109
50% S&P 500 #1 03/09/2009 34.6% 14964 122
50% S&P 500 #2 05/29/2009
BOND 07/09/2010 5.0% 15704 122
S&P 500 10/01/2010 17.3% 18418 133
BOND 07/08/2011 16.0% 21360 142
cash 09/30/2011 0.0% 21360 133
S&P 500 12/30/2011 35.1% 28865 191
open SPX 1700
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Bond Allocation Dates:

Bond Cash / SP500 % return
07/08/1946 10/01/1946 -4.6%
07/05/1960 10/01/1960 2.0%
09/03/1982 10/01/1982 4.1%
07/10/1992 10/02/1992 2.4%
07/11/1997 10/02/1997 5.0%
07/02/1998 10/02/1998 7.3%
07/09/1999 10/02/1999 1.1%
07/06/2000 09/28/2000 2.6%
07/06/2001 09/29/2001 5.6%
07/05/2002 10/04/2002 11.9%
07/03/2008 10/03/2008 3.4%
07/09/2010 10/01/2010 5.0%
07/08/2011 09/30/2011 16.0%
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Statistics 1924-2013, 2000-2013

S&P 500 B&H Market Map model 2
dividends excluded dividends excluded
1924-2013 1924-2013
CAGR 6.7% 12.1%
Average 8.43% 11.72%
Standard Deviation 18.8% 13.2%
Sharpe Ratio 0.45 0.84
S&P points captured 1642 2910
S&P (+ BOND) cum % during invest n/a 1146%
S&P cum % during cash n/a -226%
# of trades n/a 99
% of months BOND invested n/a 3.4%
Max Drawdown 1929-1932 1941-1942
-86% -22%
Worst month -29.9% -13.9%
% positive months 60% 65%
$1 becomes $191 $28,865
S&P 500 B&H Market Map model 2
dividends excluded dividends excluded
2000-2013 2000-2013
CAGR 1.00% 14.4%
Average 1.7% 11.4%
Standard Deviation 17.9% 17.2%
Sharpe Ratio 0.09 0.57
S&P points captured 181 1531
S&P (+ BOND) cum % during invest n/a 197%
S&P cum % during cash n/a -84.0%
# of trades n/a 21
% of months BOND invested n/a 11%
Max Drawdown 2007-2009 2007-2008
-56.0% -14.5%
Worst month -16.9% -9.7%
% positive months

59%

71%
$1 becomes $1.13 $5.64
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In comparing the statistics table above to the statistics table for Market Map model 1, here we can surmise that adding bond allocation and using a two stage entry strategy for select equity allocation enhances overall returns and lowers max drawdown albeit with higher portfolio turnover.

In our next article, we will apply the Market Map model to the Nasdaq Composite and the Nasdaq 100 index.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.