Compounds in leaps, while you sleep.
MacroWinds (v4.0) is a tactical asset allocation model that navigates the Credit, Inflation and US Dollar cycles using Absolute, Breadth and Relative momentum. This is a monthly cadence model, built with the goals of Simplicity, Flexibility, High Performance and Tax Efficiency.
Model only uses broad ETFs and avoids individual stocks, derivatives, asset classes with less than a decade of history or any other funny financial instruments. Care has also been taken to avoid data-mining.
The model has 3 modules as depicted in the diagram below. The Fight module Switches between a subset of US and ex-US equity indices and overlay commodities when appropriate. This is a concentrated module aimed at growing wealth. The Fright module is a shock-absorber that switches between Long Term Treasuries and Gold. Fight and Fright together constitute the Risk-On phase. The Flight module switches between TIPS, US 10 yr Treasuries and Cash during recessions and alone constitutes the Risk-Off phase.
The table below shows the results of varying the Fight/Fright proportions to suit various investor needs. An allocation would be chosen based on how soon investors need their capital and what their goals are. For example, folks looking at a withdrawal under 10 years or those who prefer lower volatility could choose an allocation under 50/50 to minimize risk, whereas investors willing to wait a few decades could choose an 80/20 allocation to maximize returns.
In the table above, as we increase the allocation to equities from left to right, CAGR, drawdowns, correlation, beta tend to increase due to concentration. The Sharpe rises until a 60/40 allocation and then tapers off, thus making 60/40 a sweet spot for risk-adjusted-returns.
When comparing performance to other asset allocation models, it is worthwhile to look at the “Worst 10-yr Rolling CAGR”, since it truly indicates how much an investor’s patience would be tested. Imagine having to explain to your clients / spouse that your S&P500 portfolio has lost money over the past decade. This is exactly what happens with S&P 500 (last column in the table above).
The other metric to focus on, from a behavioral standpoint, is “Max Drawdowns”. Would an occasional drawdown of 20% cause dark circles, gray hairs or maybe divorce? If so, it might be best to choose allocations lower than 80/20.
This discussion below assumes an 80/20 Fight/Fright allocation, with monthly rebalancing.
$10k invested in MacroWinds 80/20, since Jan 1989, would’ve grown by over 600x to about $6m by the end of 2022. 600x over an investing lifetime. By contrast holding the S&P 500 would’ve grown the initial capital to just under $300k - a 30x return. And 30x over 33 years isn’t bad. But MacroWinds’ 600x return makes 30x look like peanuts.
MacroWinds 80/20 did pretty well during the last two major downturns - dot-com and subprime -with modest drawdowns, compared to S&P500’s ~40% to 50%. It is doing well during the 2022 meltdown too.
MacroWinds 80/20 only had one year with lower than -5% returns (thru 2022) compared to S&P 500's four over the backtest period.
MacroWinds 80/20 had a worst 5-yr rolling CAGR of positive 11+% (vs S&P 500’s negative 2.3%). This is testament to MacroWinds’ ability to weather downturns and still offer meaningful returns coming out of tough recessionary periods.
MacroWinds 80/20 had a worst 10-yr rolling CAGR of 13+%. So any 10-yr period during the backtest would’ve comfortably more than tripled the initial capital. The S&P 500’s worst 10-yr rolling CAGR stood at -1.38% (yes, negative) over the same period. Can you imagine going through a decade of losing money and not losing your mind?
The table for Monthly Performance from Jan 1989 up to present months can be found here and is updated after the close of each month (The stats above are updated annually).