Historically and up to 2013, equities have exhibited a positive bias during the end of the month.
Here is an example of buying the SPY etf on the first down-day after the 23rd and selling on the first up-day of the next month. Trading is at the same day close.
This has been well documented in academic papers as well as blogs. The main reason quoted for this persistent bias has been end-of-month window dressing.
As one of my favorite author/blogger/trader, Mr. Grøtte, has also recently blogged the EOM bias is no more.
Why is this important to know?
A lot of investors re-balance monthly. The day of the re-balance used to be somewhat important as there was an EOM bias. So it was better to ‘buy’ at the end of the month rather than at the beginning of the month. As of late (2013) this is less true.
What this means in practice is that the specific timing for re-balancing monthly strategies may be less important than it used to be.
Buy=Day()>=23 AND C<Ref(C,-1) ;//AND C>MA(C,100);
Sell= (Day()<11 AND C>Ref(C,-1));
posqty=Param("nUMBER OF pOSITIONS",1,1,30,1);
bars = 10; // exit after 10 bars
ApplyStop( stopTypeNBar, stopModeBars, bars, True );
There is something very attractive about vintage items that just won’t die.
They just keep coming back. Same philosophy but better up-to-date technology.
It’s not just cars. It’s investment strategies, too.
Vintage strategies are often simple, easy to execute and provide amble ‘out-of-sample’ data. In other words one can see how they performed in real life years after they have been proposed. And like the VW bug, they are “safe” choices. Tried and true. Can you imagine a 1965 VW running in the Autobahn? Although the essence counts for a lot, for the car to survive at today’s highway speeds the tech needs to be up to date.
So let’s take my favorite oldie and bring it up to speed:
Harry Browne’s Permanent Portfolio investment strategy.
… Browne believed that each of the aforementioned four asset classes would thrive in one of the four possible macroeconomic scenarios that exist.
Stocks would thrive during periods of economic prosperity.
Bonds would do well in deflation and acceptably well during periods of prosperity.
Gold during periods of high inflation would rapidly increase in value as the only true defense against a deteriorating currency.
Cash would act as a buffer against losses during a routine recession or tight-money episode, and would act well in deflationary times.
So let’s see how it has performed.
The original rules: 25% in a stock market Index (SP500) 25% in Treasuries. 25% in Gold. 25% in Cash or similar.
Not bad. Annual return is 7.1% and maximum draw-down comes in at 17.84% since 1992.
For a far more detailed analysis of the so called “PP” you can see Gestaltu’s excellent “PP Shakedown” series as well as Scott’s Investments analysis. There are many other articles and analysis that serve as inspiration to this article.
Building a new investment strategy.
So let’s update this permanent portfolio strategy by using some recent tactics. All further rules assume monthly rebalance.