This trounces the 9.69% and 6.38% returns from SPY and TLT alone. The total returns of 430% over 10 years corresponds to about 15.7% compounded annual growth rate ( OTC:CAGR). From Januto December 31, 2013, the results of the system versus SPY and TLT are: The 85-day lookback provided maximal returns over the past 10 years, and was used for the results below. Only 89 trades were made in the 10-year backtest period. The data is available at almost all of the popular investment websites.Īlthough the x-day performance is calculated each day, trades are rarely signaled daily. These calculations can be performed in Excel, on a napkin at the bar, or in one's head. The x-day performance is calculated daily by dividing the current close by the close x days ago. An investment is made in the ETF having the highest prior x-day performance. The system determines the x-day price performance of the S&P500 (via SPY) and US long bonds (via TLT). This fact is terribly true in trading, and is the basis of the trading system presented: follow the money. The Basis Of The Proposed System: Trending. This article presents a simple approach that can be implemented in Excel or a hand calculator with minimal effort or sophistication.

Further, the signals relied on by these systems (e.g., ADX, RSI, Bollinger Bands) can be difficult to understand and calculate without some mathematical expertise. The data used by many of these systems is not readily available on popular websites like Google Finance and the like. Many of these systems require sophisticated charting and analysis of the underlyings in order to determine the appropriate trigger. Growth ratio of 1.33 (this custom metric is explained below)Ī web search of rotation strategies inevitably returns countless ways of trading between US stocks and US long treasuries in light of various market conditions.Over 15.5% CAGR from Januto December 31, 2013.The system can easily be understood and implemented using unspecialized tools and without the need for complex mathematical calculations. Results and analysis of 10-year and 23-year backtests are also provided. This article proposes a trading system that provides returns like the S&P with the risk of a long bond fund. We all want to have the best of both worlds.

Even in notorious years such as the bond selloff in 1994, losses for treasury investors were unexceptional (-12%) compared with those regularly experienced in global equity markets.Muhammed Ali was known for floating like a butterfly and stinging like a bee. That’s way more than the 11% seen in US treasuries. Overall, the worst ten drawdowns in global equities average 27%. Even last year’s drawdown (-11% loss), which was seen as relatively mild, would rank as the fifth worst in 40 years of US treasury market performance. Equity investors lost 48% of their money in the 2008 drop and 33% in the 2002 correction. But this worst annual drawdown in treasuries wouldn’t even make the top ten for global equities. For example, in 1980 10-year yields rose from 9% to 14%. There have been some ugly experiences for investors in the US treasury market over this period. Figure 6 shows the top ten global equity and US treasury draw-downs in each year since 1970. Of course they can lose money in the bond market, but the equity market has always had the capacity to lose them so much more.

Perhaps this is what makes them such skittish participants in the equity market. “Bitter experience means that the bond refugees are now very aware of the Warren Buffett classic: “The first rule of investing is don’t lose money the second rule of investing is don’t forget rule number one”. And while the past doesn’t perfectly rhyme with the future, it does provide us with a better general understanding: Proper portfolio contruction is all about understanding how different asset classes operate relative to one another. I thought this was a nice bit of perspective from CitiGroup analysts regarding the historical drawdowns between stocks and bonds.

Bond drawdown