The Long Term Stock Market Timing Return Since 1871
Last week, we wrote about S&P 500 rolling 10 to 20 years returns for over 100 years (see April 17, 2017: Risk vs. Volatility: Long Term Stock Market Returns). It’s natural to ask how active investment strategies can improve returns and/or reduce risk (or overall volatility). As many have known, we have advocated strategies that are based on long term stock market valuation metrics (see March 13, 2017: Long Term Stock Valuation Review, for example) or long term stock timing such as S&P 500 total return 200 days (10 month) moving average (see February 20, 2017: Long Term Stock Timing Based Portfolios And Their Roles). In this newsletter, we will look at how the 10-month (or 200 days) moving average based portfolio on S&P 500 has performed for this long period of time.
The moving average portfolio is very simple: at each month end, look at the S&P 500 total return (i.e. not just index price, but with dividend reinvested) and its 10 month moving average. If the total return is above the moving average, it invests in S&P 500, otherwise, it just invests in cash. In this study, we further assume cash does not generate any extra return, an assumption we will discuss later.
Using the same Shiller’s monthly S&P 500 index data which spans from 1871 to the end of 2016, we construct a 10-month moving average of S&P 500 total return (dividend reinvested) based portfolio, what we find is the following:
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