No. of Recommendations: 8
There are two parts to these schemes.
One is selecting the asset(s) to hold
The other is the in/out (timing) signal.
This is a very profound summary, because the first step is underappreciated: I think the key is to have something in step 1 that won't blow up in your face.
To get the smooth returns that the OP desires, it would almost be a requirement to be hedged all the time.
Why?
Because at a very high level, there are two kinds of market drops: rollovers and plunges.
Almost all (not all, but most) timing systems are in one way trend followers, so as a rule they can't handle sudden plunges.
There are good timing systems that will add value over time in terms of much better sleep, but only on average. Once in a while there will be a drop that it didn't catch--you have to be prepared to live with that.
Getting back to my first comment, if what your underlying securities are solid, any plunge will unwind so it's not that bad. They'll come back.
Anyway, here is an example. A very dumb but kinda typical momentum system, calendar month based.
If the S&P total return was less than -3% in the last 3 months, be bearish. That's it. You're long around 78% of the time.
Here is something from the LargeCapCash screen family.
I just did a test with this variation:
VL universe
price/52-week high top 50%
ROE top 30%
5-year sales growth positive
(cash - long term debt) top 40
(5-year sales growth) * ROE top 30, hold till drop at 40
The timing overlay: go to cash if the S&P return in the last 3 months was less than -3%
Backtest results 1997 to 2023 inclusive:
CAGR screen 14.9% versus S&P 9.1%
Risk (rolling year downside deviation with MAR 10%): drops by half compared to S&P
Probability of a positive rolling year 87% versus S&P 79%
90% of rolling years have a return over -1.5%. S&P with 90% better than -15.5%.
Still only a 60% chance of the OP's goal of 10%/year in a rolling year.
Jim
