Three-Way Model (Ned Davis Research)

Ned Davis Research's Three-Way Model, popularized by Meb Faber: stocks, long-term Treasuries, and gold. Each month it holds, in equal parts, every one of the three whose 3-month average price is above its 10-month average, so it can hold all three at a third each, two at half each, or one at 100%. With none in an uptrend it holds Treasury bills.

Designed by Ned Davis Research, 2015. Implemented and tracked by Tactfolio.

Open the live strategyCopy it to your account
1×2×3×5×20072011201520192023
Growth of $1, log scale. Strategy SPY. Hypothetical results on daily ETF prices with trading costs, through Sep 2026.
May 2007 – Sep 2026StrategySPY
Annual return (CAGR)10.3%10.7%
Worst drawdown-20.9%-55.2%
Sharpe ratio0.880.62
Volatility11.9%19.7%
Annual return since publication (Jul 2015)8.3%14.2%

The Three-Way Model is a trend-following strategy from Ned Davis Research, shared widely by Meb Faber in a 2015 blog post. It owns three assets, US stocks, long-term Treasuries, and gold, and each month holds equal parts of whichever are in an uptrend, defined as a 3-month average price above a 10-month average.

The idea#

Stocks, long Treasuries, and gold tend to do well in different conditions: stocks in economic growth, long Treasuries when rates fall and in recessions, and gold in inflation and financial stress. It is rare for all three to fall for long at the same time. The model does not try to predict which conditions are coming. It simply owns whatever is going up and drops whatever is going down.

Faber's point in sharing it was how little the details matter. Many systems of this kind, with different assets and lookbacks, behave alike, because the common ingredient is investing in what is rising and avoiding what is falling.

How it works#

At the close of the last trading day of each month:

  1. For US stocks (SPY), long-term Treasuries (TLT), and gold (GLD), compare the 3-month average price with the 10-month average price.
  2. Hold every asset whose 3-month average is above its 10-month average, in equal parts: a third each, half each, or all in one.
  3. If none is in an uptrend, hold Treasury bills (BIL).

Ned Davis Research averaged month-end prices; this version averages daily closes over 63 and 210 sessions. The source does not say what happens when no asset qualifies, so this version holds Treasury bills, as Allocate Smartly does.

What the backtest shows#

The ETF test runs from mid-2007. The Three-Way Model compounded about 10% a year, close to the S&P 500, with a worst drawdown of about 21% against more than half for the index. It beat a 60/40 portfolio on both return and risk-adjusted return.

Its best year was 2008, a gain of 28% while the S&P 500 lost 37%, with Treasuries and gold carrying it. The reversal cost it the next year: its worst drawdown ran from the end of 2008 to July 2009, as Treasuries fell back and stocks rebounded before the model owned them, and it lost 3% in 2009 while the S&P 500 gained 26%. It recovered by April 2010. Its weakest recent years were 2015 and 2018, with losses of about 9% and 10%, and it lost 12% in 2022, when stocks and Treasuries fell together. Gold's rally drove a gain of 27% in 2025.

Since Faber's post in mid-2015 it has compounded about 8% a year with a worst drawdown of about 19%. With simulated history the test starts in 1969 and compounds about 11% a year, slightly ahead of the S&P 500 with a much better risk-adjusted return. It gained 21% in 1974 while stocks lost 27%, and gold's surge produced a 57% gain in 1979. Its worst simulated drawdown, about 32%, ran from mid-1973 to mid-1974.

When it struggles#

  • Sharp reversals. Moving-average crossovers turn late, as in 2009, when it missed most of the stock rebound.
  • Stocks and bonds falling together. In 2022 rising rates hurt two of its three assets at once.
  • Gold swings. Gold can be a third, half, or all of the portfolio, and its trends reverse abruptly.

Using it on Tactfolio#

The live strategy above runs the 3- and 10-month average crossover on daily closes. Copy it to add a fourth asset, such as commodities or foreign stocks, or to use intermediate Treasuries in place of long ones.

Year by year

YearStrategySPY
2026*2.9%14.0%
202526.8%17.7%
202416.5%24.9%
202313.0%26.2%
2022-12.0%-18.2%
202116.5%28.7%
202023.0%18.3%
201913.1%31.2%
2018-9.9%-4.6%
201716.1%21.7%
20163.3%12.0%
2015-8.5%1.2%
201413.3%13.5%
201322.0%32.3%
20129.5%16.0%
201115.3%1.9%
201013.7%15.1%
2009-3.2%26.4%
200828.0%-36.8%
2007*11.7%-3.4%

* Partial year.

The rules as implemented

This is the exact tree Tactfolio runs, rebalanced monthly with signals and trades at the close. Open it to inspect or copy it.

  • StrategyNed Davis Three-Way Model
    • WeightEqual
      • If63d moving average of SPY is above 210d moving average of SPY
        Then
        • WeightEqual
          • If63d moving average of TLT is above 210d moving average of TLT
            Then
            • WeightEqual
              • If63d moving average of GLD is above 210d moving average of GLD
                Then
                • WeightEqual
                  • TickerSPY
                  • TickerTLT
                  • TickerGLD
                Otherwise
                • WeightEqual
                  • TickerSPY
                  • TickerTLT
            Otherwise
            • WeightEqual
              • If63d moving average of GLD is above 210d moving average of GLD
                Then
                • WeightEqual
                  • TickerSPY
                  • TickerGLD
                Otherwise
                • WeightEqual
                  • TickerSPY
        Otherwise
        • WeightEqual
          • If63d moving average of TLT is above 210d moving average of TLT
            Then
            • WeightEqual
              • If63d moving average of GLD is above 210d moving average of GLD
                Then
                • WeightEqual
                  • TickerTLT
                  • TickerGLD
                Otherwise
                • WeightEqual
                  • TickerTLT
            Otherwise
            • WeightEqual
              • If63d moving average of GLD is above 210d moving average of GLD
                Then
                • WeightEqual
                  • TickerGLD
                Otherwise
                • WeightEqual
                  • TickerBIL

Sources and caveats

  • Ned Davis compares 3- and 10-month averages of monthly prices; this version compares the 63- and 210-session averages of daily closes.
  • SPY, TLT, and GLD stand in for the S&P 500 total return index, the Barclays long-term Treasury index, and gold bullion.
  • The source does not say what the model holds when no asset is in an uptrend; like Allocate Smartly, this version holds Treasury bills (BIL).
  • Signals and trades use the close of the last trading day of each month, as in the source.

Common questions#

What is the Ned Davis Three-Way Model?#

It is a trend-following model from Ned Davis Research that holds stocks, long-term Treasuries, and gold in equal parts, but only those whose 3-month average price is above their 10-month average.

What ETFs does the Three-Way Model use?#

SPY for US stocks, TLT for long-term Treasuries, GLD for gold, and BIL for Treasury bills when none of the three is in an uptrend.

How often does the Three-Way Model trade?#

It checks once a month. The set of holdings changes only when an asset's 3-month average crosses its 10-month average; in other months it just rebalances the holdings back to equal parts.

Does the Three-Way Model still work?#

Since it was published in 2015 it has compounded about 8% a year with modest drawdowns, though it lost money in 2015, 2018, and 2022. The live record on Tactfolio shows how it is doing now.