Long Term Stock Market Timing Since 1871 Revisited
It’s one of our core beliefs that a sensible long term stock market timing strategy can reasonably improve investment returns and dramatically reduce risk. We have regularly reviewed a simple 10-month simple moving average based timing strategy over S&P 500 index. For the recent review, please see April 24, 2017: The Long Term Stock Market Timing Return Since 1871.
It’s certainly interesting to look at the updated data in light of the recent market stress induced by the coronavirus pandemic.
A few words on the data: we take S&P 500 composite data from Shiller’s famous site and among the S&P 500 monthly data (dividend, price), we perform a 10-month moving average over the composite’s total return series: when the S&P 500 total return is above its moving average, it invests 100% in the index, otherwise, it just retains the previous month’s value (that means it derives 0 interest from cash generated from selling S&P 500). Technically, this strategy is different from a pure S&P 500 price based as it relies on its total returns. This strategy actually underestimates returns in some meaningful way: in a real world implementation, when the index is under its 10-month average, one can at least invest in cash (i.e. money market) or better yet, invests in a bond fund such as an intermediate Treasury bond fund or better yet, invest in a good fixed income strategy such as those on our Fixed Income page when not holding S&P 500 index.
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