Three-Way Model by Ned Davis

The Three-Way Model was developed by Ned Davis Research (NDR), the institutional quantitative research firm, and was publicly documented by Meb Faber in a June 2015 blog post. The model selects from three asset classes -- US stocks, long-term US Treasury bonds, and gold -- based on a simple moving average trend filter applied to each, and holds only the assets currently showing an uptrend in equal weights.

Investment Philosophy

The strategy's core principle is straightforward: invest in what is going up and avoid what is going down. Each month, the model checks whether each asset's 3-month moving average is above its 10-month moving average. Assets that pass are considered to be in an uptrend and eligible for allocation. Those that fail are excluded. The portfolio then holds the qualifying assets at equal weight -- one, two, or three positions depending on how many pass -- or moves entirely to cash if none do. The three assets were chosen because they have historically performed well in distinct economic environments: stocks during growth, bonds during deflation, and gold during inflation. Holding all three through a trend filter avoids commitment to any single scenario.

Who It's For

This portfolio suits investors who want simple, rules-based exposure across the major return drivers in different economic regimes, with a trend filter that reduces the impact of sustained downtrends in any one of them. A medium-to-long time horizon is appropriate, as the moving average signals require time to smooth over periods when the filter generates whipsaw trades.

Pros

• Extremely simple rules -- just two moving averages per asset, evaluated once per month
• Three-asset universe covers major economic regimes without complex allocation decisions
• Equal weighting is transparent and requires no optimization
• Strategy history extends to 1968, providing a long out-of-sample record including inflationary periods

Cons

• Very limited asset universe -- no international equities, real estate, commodities, or credit exposure
• Moving average signals respond slowly to sharp, rapid market reversals
• Extended periods of 100% concentration in a single asset (e.g., all bonds or all gold) can be uncomfortable

Technical Notes

The trend filter compares the 3-month simple moving average against the 10-month simple moving average for each asset. Rebalancing occurs monthly on the last trading day. Cash is held when none of the three assets pass the trend filter. The strategy's tested history begins in 1968 when gold began trading freely following the breakdown of the Bretton Woods system.