AAA Made Easy For Retail Investors

During 2013 several asset allocation strategies have been presented on this blog. However, all these studies are tailor made for the specific parameters required by the strategy involved. To accommodate the exploration of similar strategies for DIY retail investors a flexible framework would come in handy. And so we have arrived at the rationale of the "All-In-One" Adaptive Asset Allocation suite.

The AAA suite is intended for backtesting numerous asset allocation strategies like TAA, GMR, FAA but also GMRE or BRS (published by Frank Grossmann on Seeking Alpha). The suite consists of two studies:
- AAA_Allocation: for showing historical and present asset allocation (required for "live" trading).
- AAA_Equity: for getting an impression* of portfolio wise performance (non essential).
The suite supports portfolio sizes with up to 12 assets next to a cash proxy.
Rebalancing of capital between the TopX assets is equal weighted.

The composition of the default AAA universe is inspired by the asset class map provided by the guys from Gestaltu to account for each of the four growth | inflation regimes (see also Conceptual sketch).

Source: gestaltu.com

To achieve the desired level of flexibility the suite has quite a lot user adjustable settings:
To familiarize ourselves with the "nuts and bolts" let us walk-through the TAA strategy: monthly rebalancing solely based on momentum, all capital is allocated to the top performer out of EFA, IWM, SPY and TLT with no dedicated c(r)ash protection.

Another example: the Bond Rotation Strategy: monthly 50%:50% rebalancing into the two top performers out of a five asset universe: AGG, BND, CWB**, JNK and TLH.

Last example: AAA compared to FAA (the settings are in the charts):

There are (at least) a few points to note:
* TOS does not provide dividend adjusted quotes which would be preferable for backtesting, offsetting results and statistics.
** Use as chart symbol the asset with the shortest price quote history in TOS for proper equity curve painting (which are for the used example universes: EMB, CWB and DBC).
*** The suite needs considerable execution time to run as 2 x 13 x 252 x 10 daily price quotes have to be processed, so beware for some waiting time. Therefore recommended usage is after RTH. 

The able thinkscripter might consider possibilities for extensions for the AAA suite:
- adoption of unequal weighted asset allocation as described in section 12 of the FAA paper.
- implementation of "adaptive shrinkage" into the MVC formula as proposed by David Varadi and applied by Keller and Van Putten in their brand new MAA paper.
If you do extend the suite, please share!

Download the thinkscript code (2,000+ lines) for the AAA suite from Google Drive. To enable easy review of the code, check out the contents of the AAA_Allocation file below.

Please share insights and comments through the Disqus forum below.

[Edit Januari   5, 2014: Gestaltu asset class map added]