By Austin Pryor

We recently introduced a new advanced investing strategy, Dynamic Asset Allocation (DAA), that offers two very compelling benefits: long-termmarket-beating performance along with below-market volatility.

As was mentioned in a previous post, An Investment Strategy for Such a Time as This, 30 years of back-testing showed DAA to have an annualized return of 13.6% vs. 11.1% for the S&P 500. And DAA out-performed the S&P 500 with 42% less volatility.

But would DAA be appropriate for short-term goals, such as saving for a car or a down payment for a house?

Due to the uncertainty of investing returns from month to month, we’ve always emphasized that, when investing in stocks, a time commitment of at least five years is advised. Ten years is even better (safer).

That said, I looked through 30+ years of data, beginning in January 1981, to find out what the worst-case results would have been over rolling periods of various durations. (A rolling-period test of a one-year holding period, for example, would start with the 12-months ending in December 1981, then advance one month by “rolling” to the next 12-month period running from Feb-81 through Jan-82, then to Mar-81 through Feb-82, and so on. It gives a much better look at the extremes one might experience than merely looking at calendar years.)

Here’s what I found the worst-case results would have been for someone following the Dynamic Asset Allocation strategy (these are annualized numbers):

  • -15.7% for one year
  • -0.7% for two years
  • +0.2% for three years
  • +4.0% for four years
  • +6.0% for five years

The average result for all five periods tested was in the +13% range, but that obscures the results from the great years and the not-so-great years. As you can see, as is almost always the case in research of this kind, extending the holding period by a year improves the worst-case scenario. For some, the risk of losing a little over two years might be worth the potential to make much more. Others might prefer the cushion provided by a longer holding period. Each individual will have to make that call.

Bear in mind two things. First, DAA demands self-discipline. It’s a lot more work than parking your money in a short-term bond fund, and there are potential missteps along the way. And second, these historical results do not guarantee that future worst-case scenarios will be as mild. Past results can give a degree of assurance, but the future is open and unknown. So, given that this is money you want to be available when needed, tread cautiously.

Some interesting concepts and thoughts on a shorter term dynamic asset allocation model. Please get in touch with us for comments or thoughts via this email:

Per Olov Jansson
CEO Cardea International


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