This strategy backtest uses the Vanguard VFINX/VUSTX index funds as a proxy to the SPY/TLT ETFs. With these Vanguard funds I have made a 20 year backtest for the UIS strategy. 20 years Strategy backtest of our Universal Investment Strategy I made this strategy backtest, because many subscribers asked for it, and because with these two Vanguard funds, this is also one of the only strategies which can be backtested for such a long period. In general however, I think that it is much more important, how a strategy performed after 2008. The market has changed considerably during these last years, and if you would only invest in strategies which can be backtested 20 or more years, then you would have missed most of the investment opportunities of the recent years. For the backtest, I use our QuantTrader software. You see the screenshot of the results below. The upper chart shows the VFINX/VUSTX performance. The middle chart shows the allocation with red=treasury and yellow=S&P500. Overall, you can say that for buy and hold investors, treasuries have been the better investment for the last 20 years in this strategy backtest. The sharpe ratio (return to risk) of the VUSTX treasury is 0.79, while the sharpe of the VFINX S&P500 fund is only 0.5. With VFINX/VUSTX combined, the strategy achieves a sharpe of 1.28, which is more than double the return to risk ratio of a stock market investment. This means that instead of investing 100'000$ in the US stock market, using leverage, you could invest 250'000$ in the UIS strategy. This way you would have had the same risk, but nearly 30% annual return. The strategy backtest shows a very smooth equity line and the real max drawdown is well below 10%. The 11.68% drawdown peak measured in 2008 was in fact only an extreme mean-reversion [...]
On November 2013 I published the first SA article on the Bond Rotation Strategy (BRS) as excelent diversifier for a 401k Investment Portfolio. Now, 15 months later, I am presenting an important update for this strategy with adaptive allocation. Even though the old strategy has done well (see charts here: https://logical-invest.com/strategy/bond-rotation-sleep-well/), I think it is very important to constantly validate and improve any investment strategy. Markets change, ETFs change even we ourselves grow and learn. Especially as I´ve been approached by US Investors asking whether this was a suitable strategy for 401k Investment Portfolio. I am also glad to say that I am still improving my knowledge and striving to pass that knowledge as to grow the returns and limit the risk of my own investments. Approach of Universal Investment Strategy, better suited as 401k Investment Portfolio In November 2014 I presented the Universal Investment Strategy which was based on a variable allocation of the SPY-TLT ETFs (http://seekingalpha.com/article/2714185-the-spy-tlt-universal-investment-strategy). This new concept of an ETF rotation with variable allocation is very versatile and can be used on all types of strategies. For the BRS strategy, this new way to calculate allocations results in a considerably improved Sharpe (Return/Risk) ratio of the strategy. Here is the ETF selection for the BRS Old ETF selection New ETF selection CWB - SPDR Barclays Convertible Bond CWB - SPDR Barclays Convertible Bond JNK - SPDR High-Yield Junk Bond (4-7yr) JNK - SPDR High-Yield Junk Bond (4-7yr) TLH - iShares 10-Year Treasury (9-11yr) TLT - iShares Long-Term Trsry (15-18yr) PCY - PowerShares Emerging Mkts Bond (7-9yr) AGG - iShares Core Total US Bond (4-5yr) not necessary anymore BOND - PIMCO Total Return ETF not necessary anymore SHY - Barclays Low Duration Treasury (2-yr) not necessary anymore. The total allocation can go automatically below 100% An advantage of [...]
Summary: -Aggressive leveraged version of our previously published Universal Investment Strategy -Variable SPY-TLT allocations dynamically adapted to the market conditions. -45% annual return with a Sharpe Ratio of 1.3 since 2002. Due to its simplicity and low correlation to the S&P 500, there is a continued interest in the UIS version that uses 3x leveraged ETFs: ETF SPXL (Direxion Daily S&P 500 Bull 3X Shares ETF) and TMF (Direxion Daily 30-Year Treasury Bull 3x Shares ETF). Following the suggested nomenclature by Al from AAII SV - and to honor their interest, we call this version “Hell on fire”, which alludes to the high risk/return profile of the strategy. We will show ways to blend this strategy in a well-balanced and risk-optimized portfolio as to overcome the generally negative perception of private investors towards leveraged ETF.
Intelligent Algorithms run two prallel sub-strategies. Meta- layer chooses between the two sub-strategies based on current market conditions. Variable allocation to Treasuries provides protection from large drawdowns. This strategy is a good fit for investors that want to invest intelligently in the U.S. equity market as well as for stock-pickers looking for a rules-based growth strategy. The strategy can also complement our existing strategies and can work well with our more conservative strategies like BRS (bond rotation), the BUG or with non-U.S. equity strategies like World Top 4.