Volatility-Based Asset Allocation

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  • Diversification is an effective risk-management tool, but it does not do enough for the investor that is intensely afraid of large drawdowns. We propose volatility-based allocation as an additional tool.
  • Volatility-Based Allocation (VBA) is a two-signal model that is simple-to-implement, robust, and historically generates a favorable risk/reward return profile. The first indicator in VBA is the volatility regime signal, which simply identifies “Risk-On” and “Risk-Off” market regimes. The second indicator in VBA is the long-term moving average signal, which invests when the current price is above the 12-month MA, and invests in the risk-free rate otherwise.
  • Over the March 1, 1986 to August 31, 2012 period, VBA generates a CAGR of 9.76% and a maximum drawdown of 9.64% when applied to our 5 core assets classes: domestic equity, developed equity, emerging equity, real estate, and long-term government bonds.
  • VBA dominates the stand-alone long-term moving average as a risk management platform.
  • VBA also has a low correlation with other “standard” asset allocation frameworks (e.g., risk-parity, min-variance, momentum/trend-following, etc.)

Team Mission: To empower investors through education.