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 reaction following a near 20% up spike. So, the max drawdown is more than 5x smaller than a buy-and-hold stock market investment. Personally, this is in fact the biggest argument for such a strategy. All together, we had several major market correction like the 2000 tech bubble dot-com crisis, the 2001 9/11 attack, the 2003 Gulf war, the 2008 subprime crisis, the 2011 European sovereign debt crisis …. and lots of other smaller corrections. The UIS strategy always performed very well during these corrections.
From 1995 to 2007, the UIS strategy backtest had quite a stable 12% annual return. After 2008 the UIS return increased to 15% annually. The main reason for this improvement is the increased volatility and momentum factors present in the market. After the 55% correction of the US stock market in 2008, VFINX had a lot to recover the last years. In fact, the normal average growth rate of the S&P500 is about 9% and not 15% like it was during the last 5 years.
The UIS strategy backtest “likes” such market corrections from time to time, because then the strategy can profit during the down market from treasuries going up and when the market goes up again, then the strategy can profit a second time from a higher stock market allocation. This way, the strategy can return more than each of the two single ETFs.
If you want to check the monthly investments of this strategy, then you can download here the full backtest Excel file: 20 year performance log UIS VFINX VUSTX