Primer 2: Allocation System & 1st Performance Update

Between August 28, 2006 through April 10, 2007 the Silver ETF (ticker: SLV) returned 13.97% The Gold ETF (ticker: GLD) returned 11.32% if held over the same time period. The S&P500 Index returned 11.39% during the same period of time, exluding dividends. The similarities of returns alone, between the Precious Metals and the S&P over that period is an interesting fact in light of the outperformance by Gold and Silver for almost 7 years now.

The back-testing of this Allocation System over that ~7 month period indicates one would have generated a total return of 28.22% following the signals of when to concentrate upon SLV or GLD or a combination of the two. The hypothetical investor would have still been 100% invested in either one--or a combination of both--of the Precious Metals ETF's during the entire time.

This proposed system is not one of trading from the investment vehicles into cash and back again. One of the basic assumptions underlying this system is that the investor is wishing to maintain 100% exposure to Precious Metals with this portion of their overall investment portfolio. It could be, for instance, that the investor has a small 5% to 10% of their overall investments allocated to the metals as a hedge against inflation or other concerns about economic conditions going-forward. The goal of this system is to allow the investor to maintain that allocation to the metals while maximizing return within that sector and attempting to minimize downsize risks.

As mentioned in other posts, the Silver market has a solid, long-term history of being more volatile than Gold. Silver generally experiences greater gains during uptrends and larger losses during downtrends, relative to Gold that is. During this 7 month period in fact, the Silver ETF had one 10-day period with a 17% decline. The Gold ETF lost a lesser 9.5% during that steep correction in the metals markets. But this Allocation System being tested here would have theoretically limited the investor to a loss of even less than the 9.5% experienced in the GLD ETF alone.

During this ~7 month backtested period, the Allocation System would have signaled 8 changes in allocations. That is, 8 trades would have been made in the market between SLV and GLD to one extent or another. Sometimes the investor would have been 100% in SLV or 100% in GLD and during other periods, a combination of the two. During the 153 trading days of this period tested, 43% of the time the investor was allocated entirely to SLV; 29% entirely to GLD and the remaining 28% of the period, to GLD and SLV each in equal proportions.

Designing such a system in hindsight is, of course, monumentally easier than making the correct investment decisions ahead of time. That is the point of documenting this system here to create an objective analysis and track-record simulating how such a system would actually perform in the "real world" markets.


I actually began testing and documenting this Allocation System @ The Motley Fool website, fool.com via their "CAPS" investment simulation/competition and some of these earliest posts here are more or less replicated from early work there. I continue to blog on this work and Allocation System there but the CAPS system rules and scoring system don't provide the best forum for measuring performance of a system such as this. This blog will be my primary site for documenting and refining this Allocation System but for those wishing to further verify the authenticity of my work and earliest performance history, they can also follow the progress there.

Time will indicate whether these results can be more or less replicated going-forward. I hope you will track and follow my progress here and welcome any comments, questions and discussion.

As Always, I must remind the reader that I am not an investment advisor or even a market professional. You should studiously perform your own research or consult other experts if you feel unable to make your own investing choices. There are numerous caveats and warnings one should be familiar with before investing in narrow market sectors like the Precious Metals and in very new investment vehicles like Physical Bullion "Backed" ETF's. I am simply using this forum as a place to objectively document my own work on my personal investing theories and strategies for my own portfolios. Everyone is responsible for themselves in the end.