Last Updated on December 28, 2021 at 6:49 pm
One thing is clear from this series on market timing. There is a lot of inertia when it comes to selling equity and moving to debt in the name of timing. Many seem to prefer “buying on dips”. That is whenever they “feel” there is a “buying opportunity”. So for the 4th part in this series, I focus on “buying only market timing”.
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For example, suppose your idea of low PE = 19 and high PE = 24. We consider two ways (among many) of investing: A you buy only equity when PE < 19. You buy only debt when PE > 24 and in between you invest systematically as per a given asset allocation. B You buy twice as much of equity when PE < 19 and twice as much of debt when PE > 24 and in between as per asset allocation. Let us consider examples.
Example for A. Suppose your monthly investment amount = Rs. 1000 and your asset allocation is 60% equity and 40% debt (codename 60:40). Each month you check the PE. IF PE < 19, you invest Rs. 1000 in equity and none in debt. If PE > 24, you invest Rs. 1000 in debt and none in equity. If PE is between 19 and 24, you invest Rs. 600 in equity and Rs. 400 in debt. Once a year you rebalance the portfolio back to 60:40, unless the PE < 19.
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Example for B Suppose your monthly investment amount = Rs. 1000 and your asset allocation is 60% equity and 40% debt (codename 60:40). Each month you check the PE. IF PE < 19, you invest Rs. 1000 + Rs. 1000 in equity and none in debt. If PE > 24, you invest Rs. 1000 + Rs. 1000 in debt and none in equity. If PE is between 19 and 24, you invest Rs. 600 in equity and Rs. 400 in debt. Once a year you rebalance the portfolio back to 60:40, unless the PE < 19.
In this study, I have not considered what happens to that extra Rs. 1000 when PE is between 19-24. Ideally one should assume that it gets stashed in a liquid instrument. For the record, I have already considering that in a previous study: Buying “low” with “active” cash vs buying systematically: still a surprise!
In what follows, you will see the return (XIRR) comparison between the timing model and the systematic model (invest each month and rebalance each year as per asset allocation). Apologies on the typo on “duration”! Too much work to go back and change in the figures.
photo by Valters Krontals. Concept: Thank to a quote by R. Balakrishnan. Watch his presentation: Video: R. Balakrishnan on “investing for keeps: in equities I trust”
Market Timing and Tactical Asset Allocation Series
Market Timing with Index PE Ratio: Tactical Asset Allocation Backtest Part 1
Market Timing With Ten Month Moving Average: Tactical Asset Allocation Backtest Part 2
Tactical Asset Allocation Backtest Part 3: Short-Term Vs Long-Term
Buy only equity when PE< 15; Buy only Debt when PE >19
In between as per asset allocation (see picture) and rebalance each year if PE is between 15-19. Duration = 10 years; Asset allocation 50% equity.
Buy only equity when PE< 15; Buy only Debt when PE >22
In between as per asset allocation (see picture) and rebalance each year if PE is between 15-22. Duration = 10 years; Asset allocation 50% equity
Buy only equity when PE< 15; Buy only Debt when PE >24 (50:50)
In between as per asset allocation (see picture) and rebalance each year if PE is between 15-24. Duration = 10 years; Asset allocation 50% equity
Buy only equity when PE< 15; Buy only Debt when PE >24 (70:30)
In between as per asset allocation (see picture) and rebalance each year if PE is between 15-24. Duration = 10 years; Asset allocation 70% equity
Buy only equity (2X) when PE< 15; Buy only Debt (2X) when PE >24 (70:30)
Here 2X refers to double the investment (that is buying extra). In between as per asset allocation (see picture) and rebalance each year if PE is between 15-24. Duration = 10 years; Asset allocation 70% equity. Note that in this case, due to higher investment, the final value of the timing or tactical approach will be greater, but notice that it does not reflect proportionally in the XIRRs (returns).
Buy only equity (2X) when PE< 15; Buy only Debt (2X) when PE >24 (50:50)
Here 2X refers to double the investment (that is buying extra). In between as per asset allocation (see picture) and rebalance each year if PE is between 15-24. Duration = 10 years; Asset allocation 50% equity
Buy only equity (2X) when PE< 15; Buy only Debt (2X) when PE >24 (60:40)
Here 2X refers to double the investment (that is buying extra). In between as per asset allocation (see picture) and rebalance each year if PE is between 15-24. Duration = 10 years; Asset allocation 60% equity
PE Bands with systematic asset allocation 70:30
Buy according to following bands suggested by Deepti Bhat FB group Asan Ideas for Wealth
PE <= 12 buy 100% equity and no debt
PE <= 18 buy 75% equity and 25% debt
PE <= 20 buy 60% equity and 40% debt
PE <= 22 buy 50% equity and 50% debt
PE <= 28 buy 25% equity and 25% debt
PE > 28 buy no equity and 100% debt
Rebalancing is done except when PE <=12
Systematic asset allocation is 70:30
PE Bands with systematic asset allocation 50:50
Buy according to following bands suggested by Deepti Bhat FB group Asan Ideas for Wealth
PE <= 12 buy 100% equity and no debt
PE <= 18 buy 75% equity and 25% debt
PE <= 20 buy 60% equity and 40% debt
PE <= 22 buy 50% equity and 50% debt
PE <= 28 buy 25% equity and 25% debt
PE > 28 buy no equity and 100% debt
Rebalancing is done except when PE <=12
Systematic asset allocation is 50:50
Buy Equity when price > 10MMA; Buy Debt when price < 10MMA; Systematic allocation = 70:30
Here 10MMA is the 10 month moving average. Rebalancing is done once a year regardless of price.
Buy Equity when price > 10MMA; Buy Debt when price < 10MMA; Systematic allocation = 50:50
Here 10MMA is the 10 month moving average. Rebalancing is done once a year regardless of price.
Buy Equity (2X) when price > 10MMA; Buy Debt (2X) when price < 10MMA; Systematic allocation = 50:50
Here you buy 2X in equity and X in debt when price > 10MMA and X in equity and 2X in debt when price < 10 MMA
CONTA BUY: Buy Debt (2X) when price > 10MMA; Buy Equity (2X) when price < 10MMA; Systematic allocation = 50:50
This is contra momentum investing. That is you buy 2X debt when markets start to pick up (and X in equity) and buy 2X equity when markets start to dip (and X in debt). Notice how reality does not agree with commonsense in finance!!
CONTA BUY: Buy Debt (2X) when price > 10MMA; Buy Equity (2X) when price < 10MMA; Systematic allocation = 70:30
This is contra momentum investing. That is you buy 2X debt when markets start to pick up (and X in equity) and buy 2X equity when markets start to dip (and X in debt). Notice how reality does not agree with commonsense in finance!!
Overall impressions
The timing model fares well when compared with a systematic model with lower equity (50% and not 70%). You can “get a little extra return” (not always) if you invest “:a little extra” based on timing. Whether that “little extra” is proportional to the time, effort and extra money is something that “dip buyers” will have to worry about. Personally, I think that the extra return is not large enough to lose sleep over.
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