This time, unlike Lazy
Portfolios, we see a portfolio that requires an active resource allocation.
Reading Time: 6 minutes Financial activity: Investing Knowledge level: Beginner
Summary
Who is Meb Faber?
What is “Meb Faber’s
Tactical Asset Allocation Portfolio”?
What are the asset
allocation rules?
How to build Meb Faber’s
Tactical Asset Allocation Portfolio using five different ETFs
Backtest of Meb Faber’s
Tactical Asset Allocation Portfolio
Conclusions
Who is Meb Faber?
Meb Faber is the co-founder, CEO, and CIO of Cambria Investment Management.
Meb Faber is the famous
author of numerous technical papers and books.
He has a double degree
in engineering and biology from the University of Virginia (so I think he's
pretty smart).
What is “Meb Faber’s Tactical Asset Allocation Portfolio”?
It is an active
trend-following portfolio that allocates assets across four asset classes:
- Stocks,
- Bonds,
- REITs (Real Estate Investment Trusts),
- Commodities.
These four asset
classes are divided into five categories:
- U.S. Stocks,
- Foreign Stocks,
- U.S. Bonds,
- U.S. REITs,
- World Commodities.
Meb Faber recommends
using the same portfolio weights (20%):
|
Asset Class |
Portfolio Weight |
|
U.S. Stocks |
20% |
|
Foreign Stocks |
20% |
|
U.S. Bonds |
20% |
|
U.S. REITs |
20% |
|
World Commodities |
20% |
Very simple, do you agree?
What are the asset allocation rules?
The easy-to-understand active
allocation rules of the Faber’s Portfolio are the following:
- We use graphic charts with a monthly time frame;
- A simple moving average (SMA) with 10 periods (months) is applied to the charts (do you remember my old post My Lazy Trading System #1?);
- If at the end of the month, the last closing price is above the SMA and we have no open positions, then we buy the asset class the same day at the closing price;
- If at the end of the month, the last closing price is below the SMA and we have an open long position, then we sell the asset class the same day at the closing price.
So, using this active
portfolio, you do not need to be in the market 100% of the time, unlike lazy
strategies.
How to build Meb Faber’s Tactical Asset Allocation Portfolio using five different ETFs
The Faber’s Tactical
Asset Allocation Portfolio includes the following types of Stocks:
U.S Stocks – U.S. large
and mid-cap growth and value stocks (that virtually replicate the benchmark
S&P 500 Stock Index);
Foreign Stocks –stocks
of countries outside the U.S. that have a low correlation with U.S. stocks.
So, I have picked these
two well-diversified ETFs, that have high liquidity and long performance
history:
|
Portfolio Sector |
ETF Name |
ETF Ticker |
|
U.S Stocks |
SPDR
S&P 500 ETF Trust |
SPY |
|
Foreign (International) Stocks |
iShares MSCI EAFE ETF |
EFA |
The Faber’s Tactical
Asset Allocation Portfolio includes the following types of Bonds, too:
U.S. Bonds – short,
medium, and long-term U.S. treasury, municipal, and investment-grade corporate
bonds.
I have picked this ETF:
|
Portfolio Sector |
ETF Name |
ETF Ticker |
|
U.S Bonds |
Vanguard
Total Bond Market Index Fund |
BND |
For REITs, this is my
choice:
|
Portfolio sector |
ETF Name |
ETF Ticker |
|
U.S REITs |
iShares
U.S. Real Estate ETF |
IYR |
Finally, about
Commodities, I suggest this ETF:
|
Portfolio Sector |
ETF Name |
ETF Ticker |
|
World Commodities |
Invesco
DB Commodity Index Tracking Fund |
DBC |
You can easily set up this portfolio in Google Finance after reading my post: How to set up a portfolio in Google Finance.
Backtest of Meb Faber’s Tactical Asset Allocation Portfolio
Here: ExtraDash.com (you can create an account for free), I have found a lot of metrics about this portfolio that demonstrate its performance over time, especially regarding the drawdown reduction compared to the benchmark (read them carefully!).
Conclusions
I love lazy portfolios,
but an active one could be a good choice, especially if it requires very little
effort and is based on simple-to-understand logic.
A Meb Faber’s Tactical
Asset Allocation Portfolio is easy to build with ETFs, is easy to manage over
time, and doesn’t require to be in the market 100% of the time: consider it!
A sincere wish of good
work to all!
Written by F. GRAMOLA
(*).
(*) Member of S.I.A.T.,
the Italian Society of Technical Analysis (member society of I.F.T.A. –
International Federation of Technical Analysts).
Warning
We merely cite our
personal opinions for educational purposes only.
All trademarks are the
property of their respective owners.
Investing and trading
are risky. Don't invest or trade money that you cannot afford to lose.
Initial photo by Dawn from Pixabay.
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