Last Updated on May 11, 2022 at 5:00 pm
In this article, we discuss the results of a buy when high, sell when low market timing strategy that surprisingly works with the best results out of all the timing strategies studied so far.
The strategy is identical to the tactical buying strategy for gold discussed a few days ago and is based on the momentum of the six months moving average relative to the twelve-month moving average.
We shall compare a systematic approach which is a simple SIP in 50% equity (Sensex TRI) and 50% gilts (I-BEX gilt index) with annual rebalancing versus a tactical approach which involves moving between equity and cash over ten year periods. Taxes and exit loads for both strategies are not included.
🔥Secure your future with our Robo-advisory tool trusted by over 3,500 investors and advisors. From effortless retirement planning to funding your children’s biggest dreams, turn your financial goals into reality. 🔥
Subscribe for money management solutions via email! (Link takes you to our email sign-up form) Join 32,000+ readers in our community.
👉 New Tool Alert! NaviPlan: A Privacy-Focused Multi-asset Tracker and Goal Planner 👈
Warning and Disclaimer: The following is to be treated as investment research based on past data, need not be representative of practical implementation and is not investment advice. They do not factor in behavioural/emotional aspects associated with investing. If you do not know how to understand a backtest result, and evaluate its disadvantages, then please, please DO NOT play with your money using market timing.
Not all asset allocation variations and investment durations were considered in our backtests. Past results and future results will depend on and vary according to the asset allocation mix used and investment duration considered. For example, for equity, the model works reasonably well with 50% equity or lower equity (rest in fixed income) and not so well for higher equity allocations.
Context: This is an extension of previous work – Timing the market by spotting bullish and bearish trends based on what Jim Otar calls as a hurricane warning chart in his book, “Unveiling the Retirement Myth”. You can use the Nifty Valuation indicator to track the moving averages (the sheet gives daily moving averages while we shall consider monthly averages)
Shown below is the Sensex TRI and the six and twelve-month moving averages. When the six-month moving average (6MMA) is greater than the 12-month moving average (12MMA), we buy equity, sell all gilts and buy equity. Monthly investments are directed only to equity.
When the six-month moving average (6MMA) is less than the 12-month moving average (12MMA), we sell equity and buy gilts with it. Monthly investments are directed only to gilts.
This is counterintuitive because you are shifting to an asset class that is moving up and selling it when it is going down: buying when high, selling when low. Arguably, this is the same as buying a little after the low and selling a little after the high with highs and lows defined by the 6MMA movement.
When the 6>12 indicator (dotted line) = 1, we are 100% into equity. When it is = 0, we are 100% into gilts. This strategy needs to backtested and compared a with a 50% equity and 50% gilt systematic strategy.
We will run a 10-year backtest with the ten-year window rolled over like this. Each row is a 10-year run and we have 155 runs like this.
| Start Date | End Date |
| 04-08-1997 | 03-08-2007 |
| 03-09-1997 | 04-09-2007 |
| 03-10-1997 | 03-10-2007 |
| — | — |
| — | — |
| 05-04-2010 | 03-04-2020 |
| 03-05-2010 | 04-05-2020 |
| 03-06-2010 | 28-05-2020 |
The results are shown below. A surprising 150 out of 155 times the tactical strategy won (upper left picture). The price to pay for this outperformance is (1) higher drawdowns (max fall from the peak as shown in upper right frame) (2) higher portfolio volatility (lower left frame) and (3) more no of continuous months when the portfolio was lower than a peak (lower right frame)
Those who want a high-risk, high-return strategy should take a closer look at this. We have seen from previous backrests that no method would work all the time and this is true for this too. It has failed only thrice – for 10 year runs ending April -start, May-start and May-end. One such run is shown below.
It is premature to:
- declare victory and assume we have found the holy grail of market timing. We will need to test more (see below)
- declare this as a failure just because it did not work during one of the steepest market fall. When you want higher returns, that is a dice you goto roll.
As a first step towards extended testing, we shall switch from Sensex TRI to S&P 500 TRI using Prof. Shiller’s data and switch from I-BEX gilt to US treasury bond (1Y).
Since S&P 500 TRI is available from 1900 (yes, from Excel date = 0!) and bond data only 1962, we shall use the median monthly return of the 1Y bonds = 0.23%. This is clearly an oversimplification but the timing indicator is with respect to the S&P 500 and should reasonably acceptable as a first approximation.
This gives an incredible 1336 10-year windows. Surprise, surprise, the tactical strategy got more returns 1209 times or 90%. Cleary this strategy deserves our attention.
Over 15Y, the win rate is an astounding 99% (1276 runs)
We shall have to do further study with actual US bond rates. Naturally, this is not a foolproof method but even if we include taxes, the win rate is enough to at least sit up and take notice. Kindly do your own due diligence before committing money.
Update: A tool for tactical buying and selling using moving averages is now available.
We are on Google News
Use this button to add freefincal.com as a preferred personal finance source on Google News.
Explore 1,400+ videos on YouTube!
Subscribe to get posts via email!
Join 32,000+ readers and get free money management solutions delivered to your inbox! (Link takes you to our email sign-up form)Join our WhatsApp Channel
Explore our products
🔥Join our community of 9000+ users! 🔥- Use our Robo-advisory Tool to create a complete financial plan! More than 3,500 investors and advisors use this! Use the discount code robo25 for 20% off. Plan your retirement (early, normal, before, and after), plus non-recurring financial goals (such as child education) and recurring financial goals (such as holidays and appliance purchases). The tool helps anyone aged 18 to 80 plan for retirement, plus six non-recurring and four recurring financial goals, with a detailed cash flow summary.
- Our Flagship Course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,500 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market conditions! Watch the first lecture for free! One-time payment! No recurring fees! Lifelong access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
- Join the freefincal investor circle! An exclusive space for investors, advisors, fintech employees and students to access financial planning and insurance tools, mutual fund and stock analysis tools, coding strategies and Excel macros for data extraction. 750+ members are now part of our investor circle.
- Increase your income by getting people to pay for your skills! More than 900 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner seeking more clients through online visibility, or a salaried individual looking for side or passive income, we will show you how to do it by showcasing your skills and building a community that trusts and pays you. (Watch the 1st lecture for free). One-time payment! No recurring fees! Lifelong access to videos!
- Portfolio Tracker! Track your mutual funds and stock investments with our Google Sheet!
- We also publish monthly screeners for
Our Podcast: Let's Get Rich With Pattu
On Spotify: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! On Audible: Listen to the Let's Get Rich with Pattu Podcast
Listen to the Let's Get Rich With Pattu podcast on YouTube.
Now watch Let's Get Rich With Pattu தமிழில் (in Tamil)!About The Author
Dr M Pattabiraman giving a lecture
- Dr M. Pattabiraman (PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras.
- He has over 14 years of experience publishing news analysis, research and financial product development. He has over 28 years of teaching and research experience. He is also a public speaker and keynote presenter.
- He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free, AUM-independent investment advice.
- Connect with him via @pattufreefincal on X LinkedIn YouTube
- Pattabiraman has co-authored three print books.
This book helps you ask the right questions and find the right answers. It also includes nine online calculators to create custom solutions.
(2) Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want. 
Both the boy and girl versions of "Chinchu Gets a Superpower".
Most investor problems stem from a lack of poor decision-making. We made bad decisions and money mistakes when we started earning, and we spent years undoing them. Why should our children go through the same pain? What is this book about? As parents, what if we had to groom one ability in our children that matters not only for money management and investing but for every aspect of life? My answer: Sound decision-making. So, in this book, we meet Chinchu, who is about to turn 10. The story follows what he wants for his birthday and how his parents plan it, while also teaching him key ideas about decision-making and money management. What readers say! 
Feedback from a young reader after reading Chinchu Gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from a young age. The importance of money management and decision-making based on their wants and needs. Very nicely written in simple terms. - Arun.
About freefincal & its content policy
Freefincal is a News Media organisation dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact Information: To get in touch, please use our contact form. (Sponsored posts or paid collaborations will not be entertained.)Our publications
- Your Ultimate Guide to Travel. This is an in-depth exploration of vacation planning, including how to find affordable flights, budget accommodations, and practical travel tips. It also examines the benefits of travelling slowly, both financially and psychologically, with links to relevant web pages and guidance at every step. Get the PDF for Rs 300 (instant download)
- How to profit from content writing: Our ebook is for those interested in getting a side income via content writing. It is available at a 50% discount for Rs. 500 only!