Combining Buffett Trigger and Morningstar's Best Bond Managers
12/09/2010 0 comments
In a previous article we looked at how Buffett, Shiller and Hussman indices can be used to trigger a movement from equities to cash.
We have also analyzed how using the best bond managers can deliver excellent bond performance.
We now combine both in a single strategy.
We revise the Stocks or Cash strategy to Stocks or Bonds strategy-- i.e. the portfolio either includes all stocks or all bonds. We are still not optimizing the stock portion -- so when it comes to stocks we use ^DWC (VTI with an ETF) otherwise, it picks the best of the Morningstar bond managers.
The ratio trigger point is to go to bonds when the ratio is above 115%
We compare three portfolios based on different strategies:
- Five asset SIB benchmarks with tactical asset allocation and 40% in fixed income (benchmark)
- Buffett trigger swapping between equity and cash
- Buffett trigger swapping between equity and bonds
click to enlarge
Portfolio Performance Comparison
| Portfolio Name | 1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe |
|---|---|---|---|---|---|---|
| Five Core Asset Index Funds Tactical Asset Allocation Moderate | 7% | 52% | 6% | 53% | 12% | 93% |
| P Warren Buffett Total Stock Market Valuation to GNP Ratio SO SU Weekly Strategy | 14% | 74% | 24% | 137% | 15% | 103% |
| Warren Buffett Total Stock/GNP Ratio Move to Bonds | 14% | 74% | 24% | 134% | 17% | 114% |
Given that the equity portion is very simplistic, the returns are good and there is further room to improve with a more diversified equities portfolio.
There are many optimizations possible:
- Have a minimum percentage of the portfolio in fixed income
- Have a diversified equity portfolio
- Use a different trigger
We have previously attempted to clone the bond managers with ETFs, but the returns weren't as good. We are confident that it is possible to build an equally effective (likely better) ETF equity portfolio, as the one we are using here is very simplistic.
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Symbols:AGG,BND,CIU,CSJ,DBA,DBC,EEM,EFA,GSG,HYG,ICF,IEF,IWM,IYR,JNK,LQD,MBB,MDY,MUB,PHB,QQQQ,SHV,SHY,SPY,TLT,USO,VEU,VNQ,VTI,VWO,
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