Simple and Effective Market Timing with Tactical Asset Allocation

13 Pages Posted: 17 May 2014

Date Written: May 14, 2014

Abstract

A simple market timing algorithm is examined that switches from an exchange traded fund representing U. S. equities to one holding treasury long bonds every month on the last day, the switch being made to whichever ETF has the greatest ratio of current adjusted closing price to adjusted closing price μ months earlier. The parameter μ is determined so as to maximize total return and minimize the total number of trades, however the results are relatively insensitive to μ over a fairly wide range. The performance of this scheme is compared to that of an Ivy 5 portfolio consisting initially of equal dollar amounts of ETFs in U. S. equities, foreign large blend, 7-10 year treasuries, real estate, and commodities. As with the paired switching approach, each ETF is purchased only once a month, on the last day, in this case only if its adjusted closing price exceeds the 10-month simple moving average (SMA). Otherwise that portion of the portfolio is invested in a cash surrogate.

Comparison is made over the 10-year period ending on 12/31/13. It is shown that the average annual return of the paired switching algorithm exceeds 30% in this period, which is 3 times greater than that of the Ivy 5. Moreover, only 45 trades were required for the paired switching approach, whereas the Ivy 5 required 70 in the same period. The maximum draw down was 14.6% for the Ivy 5 and 18.8% for paired switching.

Keywords: market timing, tactical asset allocation, paired switching, Ivy 5

JEL Classification: B23, C32,C53,G11,G14

Suggested Citation

Glenn, Lewis A., Simple and Effective Market Timing with Tactical Asset Allocation (May 14, 2014). Available at SSRN: https://ssrn.com/abstract=2437049 or http://dx.doi.org/10.2139/ssrn.2437049

Lewis A. Glenn (Contact Author)

Independent ( email )

No Address Available

Register to save articles to
your library

Register

Paper statistics

Downloads
1,842
Abstract Views
5,033
rank
8,425
PlumX Metrics