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The Asset Rotation Model (ARM) helps you determine how to position your investments to capitalize on growth in both stocks and bonds, while largely avoiding those unfortunate periods of major market declines.
The ARM uses a dynamic approach to asset allocation. It examines the performance of both stocks and bonds, and positions itself accordingly to generate maximum growth for a portfolio. Under adverse economic conditions, when stocks are losing value, the ARM will shift to bonds to avoid the major losses associated with market crashes.
Find Out How to Use the ARM to Manage Your Investments
The chart below shows the backtested performance of the ARM over the last 23 years. For
comparison, the performance of SPY (an index fund that tracks the performance of the S&P 500),
AGG (an index fund that tracks the Barclays U.S. Aggregate Bond Index), and a 60/40 blend of
those two funds are included in the chart. By using a dynamic approach to asset allocation, the
ARM was able to generate significantly higher returns than both stocks and bonds, while avoiding
major losses during the last three market crashes.
Model performance represents total returns and includes reinvestment of dividends and
interest. No management fees or transaction costs are included. Historical performance is not an indication or guarantee of future performance.
The Asset Rotation Model selects the top performing asset class each month (between stocks and
bonds) and shifts its investment accordingly. Often, the model remains in a particular asset
class for months or years at a time.
The strategy behind the Asset Rotation Model allows it to avoid severe market declines. In the
early 2000’s the ARM was able to sidestep the dot-com collapse by moving to the safety of bonds.
When stocks began to recover, the ARM shifted back into stocks and rode the bull market higher
until the beginning of the financial crisis. At that point, the deteriorating returns in stocks
caused the model to shift back into bonds, safely riding out the financial crisis with minimal
losses. When stocks resumed their ascent once again, the ARM switched back into stocks to take
advantage of their strong growth.
This unique approach to asset allocation contradicts much of the standard industry dogma when it comes to choosing
between stocks and bonds. However, many investors immediately recognize the benefit of only being exposed to a
certain asset class when it exhibits positive price performance. Why sit with stocks through a market crash? And why
hold bonds if their total returns are negative for extended periods of time? Click here for an explanation on why dynamic asset
allocation is a better alternative to the standard fixed-allocation approach.
The ARM not only delivers higher returns, it also substantially reduces overall portfolio risk.
The table below contains a series of performance metrics that allow you to compare the ARM
against portfolios of both stocks and bonds.
| Asset Rotation Model (ARM) Performance Metrics | ||||||||
|---|---|---|---|---|---|---|---|---|
| Strategy | Compound Annual Return | Alpha1 | Beta1 | Standard Deviation | Maximum Drawdown | Sharpe Ratio | Sortino Ratio | Treynor Ratio |
| ARM | 8.86% | 4.33% | 0.50 | 11.7% | -21.9% | 0.66 | 1.15 | 0.16 |
| SPY (S&P 500) | 6.95% | 0.00% | 1.00 | 18.3% | -50.8% | 0.38 | 0.43 | 0.07 |
| AGG (Bonds) | 3.85% | N/A | 0.01 | 4.9% | -17.1% | 0.46 | 0.59 | N/A |
| 60/40 Stocks/Bonds | 5.95% | 1.01% | 0.54 | 10.1% | -23.9% | 0.47 | 0.57 | 0.09 |
| Data for 24-Year Period (2000 – 2023) 1 Benchmarked against the S&P 500 |
||||||||
View Full Breakdown of the Performance Metrics Above
The ARM utilizes two exchange-traded funds (ETFs), which are listed below. SPY is the largest and
most widely used ETF for exposure to the S&P 500. AGG is the largest and most widely used bond
ETF; it tracks the Barclays U.S. Aggregate Bond Index
| Asset Rotation Model (ARM) Investment Options | ||
|---|---|---|
| ETF | Description | Asset Class |
| SPY | SPDR S&P 500 ETF | Stocks |
| AGG | iShares Core U.S. Aggregate Bond ETF | Bonds |
The current ARM selection and ongoing monthly updates are accessible with a premium subscription. Updated recommendations are
provided on the
first day of each month.
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The information provided here is for informational purposes only. Model returns do not reflect any management fees, transaction costs or expenses. Investing involves a great deal of risk, including the loss of all or a portion of your investment. Nothing contained herein should be construed as a warranty of investment results. Past performance is not an indication of future results. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. Model Investing maintains positions in the funds discussed within this site according to model recommendations.
