Wednesday, April 18, 2012

Efficient Frontier of Funds and Allocation Systems

I did a very basic experiment in Efficient Frontier of Buy-Hold and Tactical System where I determined the efficient frontier of the S&P 500 with itself transformed by a Mebane Faber 10-month moving average tactical allocation.

The result was interesting, but I did not pursue further.  Now with some inspiration and tools by Systematic Investor, I thought I would extend the post. This time around we will use both the Vanguard U.S. Total Bond Market (VBMFX) and Vanguard U.S. S&P 500 (VFINX) combined with both portfolios determined by tactical methods (moving average, RSI, and omega) and those funds transformed individually by the same tactical methods.  I will as always warn you that this is not advice and large losses are almost guaranteed.  Also, I would like to note that I have checked the 10-month moving average every way possible (even manually in Excel), and it has been incredible on the VFINX since 1990.  Prior to 1990, results were good but nowhere near as amazing.  If I messed up, please let me know.

From TimelyPortfolio
From TimelyPortfolio
From TimelyPortfolio

R code from GIST:

3 comments:

  1. Great post, I really liked the last chart to show the relative performance of each strategy. I just ran a quick test of the SMA10 strategy on VFINX in quantstrat. My equity curve looks similar to yours, but doesn't go quite so parabolic... could just be the scale that gives that appearance.

    Again, great posts recently. I especially like how you are demonstrating the use of knitr to generate reports.

    Ross

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  2. Nice post, one question about the combined portfolios (ma): what is the rule there regarding rebalancing and allocation?
    Cheers
    Andreas

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  3. thanks so much to rbresearch and Andreas for the comments. Rule for this simple example is monthly rebalancing. Hope to use PortfolioAnalytics or the SIT (Systematic Investor Toolkit) to try other methods of rebalancing soon. Great question with very big implications.

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