Today\u2019s post looks at a paper from Meb Faber called All Time Highs.<\/p>\n
All-Time Highs<\/span><\/h6>\n![\"Meb](\"https:\/\/the7circles.uk\/wp-content\/uploads\/2015\/01\/Meb-Faber-300x300.jpg\")
<\/a><\/p>\nMeb Faber is very familiar to us as the owner of Cambria Investments.<\/p>\n
\n- He\u2019s written some great (and easy to follow) white papers, and his firm offers a lot of interesting ETFs<\/a> (only available in the US, sadly).<\/li>\n<\/ul>\n
I\u2019m not sure when the paper came out, but it uses data up to 2019, so I\u2019m going to guess at some time during 2020.<\/p>\n
It looks at the idea of investing at (or near) all-time highs, which turns out to be a great idea.<\/p>\n
\nEach month, you check to see if an asset<\/a> is within 5% of its all-time high. If it is, you either buy the asset<\/a> (if you didn\u2019t already own the asset<\/a> based on the prior month), or you <\/span>continue owning the asset<\/a>.\u00a0If the asset<\/a> class doesn\u2019t meet this \u201call-time high\u201d hurdle, you invest your capital in the relative safety of 10-year US government bonds.<\/span><\/p>\n<\/blockquote>\n![\"US](\"https:\/\/the7circles.uk\/wp-content\/uploads\/2024\/04\/US-stocks-7-Circles-300x280.png\")
<\/a><\/p>\nFor US stocks from 1926 to 2019, this returns 9.6%, compared to 10.0% for buy and hold.<\/p>\n
\n- But the volatility is 11% instead of 19%, and the Sharp ratio is 0.57 instead of 0.36.#<\/li>\n<\/ul>\n
Best of all, the max drawdown is only 29% instead of 84% (during the Depression).<\/p>\n
![\"International](\"https:\/\/the7circles.uk\/wp-content\/uploads\/2024\/04\/International-stocks-7-Circles-300x291.png\")
<\/a><\/p>\nIt works for international stocks, too \u2013 this time with a higher return than buy and hold.<\/p>\n
![\"All](\"https:\/\/the7circles.uk\/wp-content\/uploads\/2024\/04\/All-stocks-7-Circles-300x297.png\")
<\/a><\/p>\nAnd it works for a 50:50 mix of US and international stocks.<\/p>\n
12-month highs<\/span><\/h6>\nSince it\u2019s not practical to wait around for all-time highs, Meb tweaks the system to invest when within 5% of all-time highs.<\/p>\n
![\"US](\"https:\/\/the7circles.uk\/wp-content\/uploads\/2024\/04\/US-stocks-12-months-7-Circles-300x270.png\")
<\/a><\/p>\nThings still look good.<\/p>\n
![\"\"](\"https:\/\/the7circles.uk\/wp-content\/uploads\/2024\/04\/Foreign-stocks-12-months-7-Circles-285x300.png\")
<\/a><\/p>\nIt looks even better with foreign stocks.<\/p>\n
![\"All](\"https:\/\/the7circles.uk\/wp-content\/uploads\/2024\/04\/All-stocks-12-months-7-Circles-295x300.png\")
<\/a><\/p>\nAnd great for the 50:50 mix of US and international.<\/p>\n
Since 1972<\/span><\/h6>\nIn an attempt to be even more persuasive, Meb looks at more assets, using more recent data (1972 to 2019).<\/p>\n
![\"US](\"https:\/\/the7circles.uk\/wp-content\/uploads\/2024\/04\/US-stocks-since-1972-7-Circles-300x253.png\")
<\/a><\/p>\nUS stocks look good.<\/p>\n
![\"Foreign](\"https:\/\/the7circles.uk\/wp-content\/uploads\/2024\/04\/Foreign-stocks-since-1972-7-Circles-265x300.png\")
<\/a><\/p>\nForeign stocks look good.<\/p>\n
![\"Commodities](\"https:\/\/the7circles.uk\/wp-content\/uploads\/2024\/04\/Commodities-since-1972-7-Circles-264x300.png\")
<\/a><\/p>\nCommodities look good.<\/p>\n
![\"Real](\"https:\/\/the7circles.uk\/wp-content\/uploads\/2024\/04\/Real-Estate-since-1972-7-Circles-262x300.png\")
<\/a><\/p>\nReal Estate looks good.<\/p>\n
![\"Gold](\"https:\/\/the7circles.uk\/wp-content\/uploads\/2024\/04\/Gold-since-1972-7-Circles-295x300.png\")
<\/a><\/p>\nGold looks good.<\/p>\n
![\"Aggregate](\"https:\/\/the7circles.uk\/wp-content\/uploads\/2024\/04\/Aggregate-Portolio-since-1972-7-Circles-270x300.png\")
<\/a><\/p>\nAnd finally, an aggregate portfolio split equally between each of the asset<\/a> classes looks really good.<\/p>\nGreat not new<\/span><\/h6>\nThis is a great system, but Meb admits that it\u2019s not a new one.<\/p>\n
\nThis is a channel breakout system. It\u2019s been around since the time of Donchian and likely much longer. For a fun read on this topic check out the book \u201cHow I made $2,000,000 in the Stock Market\u201d by Nicolas Darvas.<\/span><\/p>\n<\/blockquote>\nIt\u2019s also very similar to a moving average trend-following system, which Meb described in another paper and his book The Ivy Portfolio.<\/p>\n
\nEqually as important \u2013 you\u2019re NOT following the downtrend of falling stock prices.<\/span><\/p>\n<\/blockquote>\nNor is the system psychologically easy to follow:<\/p>\n
\nMany investors fear buying at recent or all-time highs. It can feel like you\u2019re chasing performance or\u00a0 showing up at the party just a few minutes before the hosts kick everyone out.<\/span><\/p>\n<\/blockquote>\nAnd it has underperformed buy and hold since the 2008 crash (since when we\u2019ve had low interest<\/a> rates and US tech stock dominance).<\/p>\nDespite this, Meb recommends some form of trend-following, ideally combined with buy-and-hold (as in his Trinity Portfolio).<\/p>\n
\n- Which sounds pretty good to me.<\/li>\n<\/ul>\n
Allocate Smartly<\/span><\/h6>\nIn March 2024, Allocate Smartly (AS) \u2013 one of the best Tactical Asset<\/a> Allocation (TAA) websites \u2013 ran a backtest of Meb\u2019s 12-Month High Switch.<\/p>\nLike me, they are big fans of Meb:<\/p>\n
\nMeb has done more than anyone to popularize TAA as a trading style, including many of the fundamental concepts used today. This is another of his simple but effective ideas. We can\u2019t say enough positive things about the impact Meb has had on TAA. He\u2019s one of the good guys.<\/span><\/p>\n<\/blockquote>\nTheir test period was from 1970 to 2023, and transaction costs are included. As before, they used five asset<\/a> classes:<\/p>\n\nThe S&P 500 (represented by the ETF<\/a> SPY), international equities (EFA), US real estate (VNQ), gold (GLD) and commodities (PDBC). Any portion of the portfolio not allocated to one of the five asset<\/a> classes above will instead be placed in intermediate-term US Treasuries (IEF).<\/span><\/p>\n<\/blockquote>\n![\"20240318.01.logarithmic](\"https:\/\/the7circles.uk\/wp-content\/uploads\/2024\/04\/20240318.01.logarithmic-7-Circles-300x180.png\")
<\/a><\/p>\nThe strategy still looks good.<\/p>\n
![\"20240318.01.linear](\"https:\/\/the7circles.uk\/wp-content\/uploads\/2024\/04\/20240318.01.linear-7-Circles-300x180.png\")
<\/a><\/p>\nIt looks even better on a chart with a linear rather than a logarithmic scale.<\/p>\n
![\"20240318.02](\"https:\/\/the7circles.uk\/wp-content\/uploads\/2024\/04\/20240318.02-7-Circles-300x173.png\")
<\/a><\/p>\nWe have better returns and Sharpe, lower volatility and shorter and shallower max drawdowns.<\/p>\n
![\"20240318.03](\"https:\/\/the7circles.uk\/wp-content\/uploads\/2024\/04\/20240318.03-7-Circles-300x180.png\")
<\/a><\/p>\nAsset classes<\/span><\/h6>\nAS also looked at the individual asset<\/a> classes:<\/p>\n![\"20240318.04-1](\"https:\/\/the7circles.uk\/wp-content\/uploads\/2024\/04\/20240318.04-1-7-Circles-300x164.png\")
<\/a><\/p>\n\nIn most cases, only trading near 12-month highs would have reduced total return \u2013 usually by a small margin. In exchange however, it would have\u00a0significantly<\/i>\u00a0reduced drawdowns and improved risk-adjusted performance (ex. Sharpe Ratio).<\/span><\/p>\n<\/blockquote>\nThis helps psychologically (investors are more likely to stick with a smoother ride) and provides for a higher SWR in retirement.<\/p>\n
Dynamic bonds<\/span><\/h6>\nSince the 2022 crash, when stocks and bonds fell together, AS has taken to describing the use of long bonds as a safe asset<\/a> as a \u201cfatal flaw\u201d.<\/p>\n\n- They fix this by applying the same logic used for risk assets within a strategy to the defensive assets.<\/li>\n<\/ul>\n
\nFor this strategy, that means we only go long US Treasuries (IEF) if they too are within 5% of a 12-month high, otherwise we shift to\u00a0cash.\u00a0<\/span><\/p>\n<\/blockquote>\nFor AS, \u201ccash\u201d is the 3-month Treasury return.<\/p>\n
![\"20240318.05.logarithmic](\"https:\/\/the7circles.uk\/wp-content\/uploads\/2024\/04\/20240318.05.logarithmic-7-Circles-300x180.png\")
<\/a><\/p>\nFor this strategy, the dynamic bond<\/a> version is close to the standard variety.<\/p>\n![\"20240318.05.linear](\"https:\/\/the7circles.uk\/wp-content\/uploads\/2024\/04\/20240318.05.linear-7-Circles-300x180.png\")
<\/a><\/p>\nMost of the stats are very similar.<\/p>\n
![\"20240318.06](\"https:\/\/the7circles.uk\/wp-content\/uploads\/2024\/04\/20240318.06-7-Circles-300x252.png\")
<\/a><\/p>\nThe only time an investor would have noticed the difference would be in 2022 when the dynamic bond<\/a> version only fell by 5.5% instead of 13.2%<\/p>\n![\"20240318.07](\"https:\/\/the7circles.uk\/wp-content\/uploads\/2024\/04\/20240318.07-7-Circles-300x180.png\")
<\/a><\/p>\nConclusions<\/span><\/h6>\nAS likes the strategy:<\/p>\n
\nThis is a simple, straightforward, effective approach to TAA. Yes, it\u2019s essentially trend-following and exhibits\u00a0high correlation to other \u201cclassic\u201d tactical strategies we track. This strategy may be worth considering as a component of a diversified Model Portfolio.<\/span><\/p>\n<\/blockquote>\nI also like the strategy and will be allocating part of my portfolio to a variation on it (most likely with more asset<\/a> classes).<\/p>\n\n- I also plan to revisit this idea in combination with classic momentum<\/a> in a later article.<\/li>\n<\/ul>\n
Until next time.<\/p>\n
![\"Meb](\"https:\/\/the7circles.uk\/wp-content\/uploads\/2015\/01\/Meb-Faber.jpg\")
<\/a><\/p>\nMeb Faber is very familiar to us as the owner of Cambria Investments.<\/p>\n
- \n
- He\u2019s written some great (and easy to follow) white papers, and his firm offers a lot of interesting ETFs<\/a> (only available in the US, sadly).<\/li>\n<\/ul>\n
I\u2019m not sure when the paper came out, but it uses data up to 2019, so I\u2019m going to guess at some time during 2020.<\/p>\n
It looks at the idea of investing at (or near) all-time highs, which turns out to be a great idea.<\/p>\n
\n
Each month, you check to see if an asset<\/a> is within 5% of its all-time high. If it is, you either buy the asset<\/a> (if you didn\u2019t already own the asset<\/a> based on the prior month), or you <\/span>continue owning the asset<\/a>.\u00a0If the asset<\/a> class doesn\u2019t meet this \u201call-time high\u201d hurdle, you invest your capital in the relative safety of 10-year US government bonds.<\/span><\/p>\n<\/blockquote>\n
<\/a><\/p>\nFor US stocks from 1926 to 2019, this returns 9.6%, compared to 10.0% for buy and hold.<\/p>\n
- \n
- But the volatility is 11% instead of 19%, and the Sharp ratio is 0.57 instead of 0.36.#<\/li>\n<\/ul>\n
Best of all, the max drawdown is only 29% instead of 84% (during the Depression).<\/p>\n
<\/a><\/p>\nIt works for international stocks, too \u2013 this time with a higher return than buy and hold.<\/p>\n
<\/a><\/p>\nAnd it works for a 50:50 mix of US and international stocks.<\/p>\n
12-month highs<\/span><\/h6>\n
Since it\u2019s not practical to wait around for all-time highs, Meb tweaks the system to invest when within 5% of all-time highs.<\/p>\n
<\/a><\/p>\nThings still look good.<\/p>\n
<\/a><\/p>\nIt looks even better with foreign stocks.<\/p>\n
<\/a><\/p>\nAnd great for the 50:50 mix of US and international.<\/p>\n
Since 1972<\/span><\/h6>\n
In an attempt to be even more persuasive, Meb looks at more assets, using more recent data (1972 to 2019).<\/p>\n
<\/a><\/p>\nUS stocks look good.<\/p>\n
<\/a><\/p>\nForeign stocks look good.<\/p>\n
<\/a><\/p>\nCommodities look good.<\/p>\n
<\/a><\/p>\nReal Estate looks good.<\/p>\n
<\/a><\/p>\nGold looks good.<\/p>\n
<\/a><\/p>\nAnd finally, an aggregate portfolio split equally between each of the asset<\/a> classes looks really good.<\/p>\n
Great not new<\/span><\/h6>\n
This is a great system, but Meb admits that it\u2019s not a new one.<\/p>\n
\n
This is a channel breakout system. It\u2019s been around since the time of Donchian and likely much longer. For a fun read on this topic check out the book \u201cHow I made $2,000,000 in the Stock Market\u201d by Nicolas Darvas.<\/span><\/p>\n<\/blockquote>\n
It\u2019s also very similar to a moving average trend-following system, which Meb described in another paper and his book The Ivy Portfolio.<\/p>\n
\n
Equally as important \u2013 you\u2019re NOT following the downtrend of falling stock prices.<\/span><\/p>\n<\/blockquote>\n
Nor is the system psychologically easy to follow:<\/p>\n
\n
Many investors fear buying at recent or all-time highs. It can feel like you\u2019re chasing performance or\u00a0 showing up at the party just a few minutes before the hosts kick everyone out.<\/span><\/p>\n<\/blockquote>\n
And it has underperformed buy and hold since the 2008 crash (since when we\u2019ve had low interest<\/a> rates and US tech stock dominance).<\/p>\n
Despite this, Meb recommends some form of trend-following, ideally combined with buy-and-hold (as in his Trinity Portfolio).<\/p>\n
- \n
- Which sounds pretty good to me.<\/li>\n<\/ul>\n
Allocate Smartly<\/span><\/h6>\n
In March 2024, Allocate Smartly (AS) \u2013 one of the best Tactical Asset<\/a> Allocation (TAA) websites \u2013 ran a backtest of Meb\u2019s 12-Month High Switch.<\/p>\n
Like me, they are big fans of Meb:<\/p>\n
\n
Meb has done more than anyone to popularize TAA as a trading style, including many of the fundamental concepts used today. This is another of his simple but effective ideas. We can\u2019t say enough positive things about the impact Meb has had on TAA. He\u2019s one of the good guys.<\/span><\/p>\n<\/blockquote>\n
Their test period was from 1970 to 2023, and transaction costs are included. As before, they used five asset<\/a> classes:<\/p>\n
\n
The S&P 500 (represented by the ETF<\/a> SPY), international equities (EFA), US real estate (VNQ), gold (GLD) and commodities (PDBC). Any portion of the portfolio not allocated to one of the five asset<\/a> classes above will instead be placed in intermediate-term US Treasuries (IEF).<\/span><\/p>\n<\/blockquote>\n
<\/a><\/p>\nThe strategy still looks good.<\/p>\n
<\/a><\/p>\nIt looks even better on a chart with a linear rather than a logarithmic scale.<\/p>\n
<\/a><\/p>\nWe have better returns and Sharpe, lower volatility and shorter and shallower max drawdowns.<\/p>\n
<\/a><\/p>\nAsset classes<\/span><\/h6>\n
AS also looked at the individual asset<\/a> classes:<\/p>\n
<\/a><\/p>\n\n
In most cases, only trading near 12-month highs would have reduced total return \u2013 usually by a small margin. In exchange however, it would have\u00a0significantly<\/i>\u00a0reduced drawdowns and improved risk-adjusted performance (ex. Sharpe Ratio).<\/span><\/p>\n<\/blockquote>\n
This helps psychologically (investors are more likely to stick with a smoother ride) and provides for a higher SWR in retirement.<\/p>\n
Dynamic bonds<\/span><\/h6>\n
Since the 2022 crash, when stocks and bonds fell together, AS has taken to describing the use of long bonds as a safe asset<\/a> as a \u201cfatal flaw\u201d.<\/p>\n
- \n
- They fix this by applying the same logic used for risk assets within a strategy to the defensive assets.<\/li>\n<\/ul>\n
\n
For this strategy, that means we only go long US Treasuries (IEF) if they too are within 5% of a 12-month high, otherwise we shift to\u00a0cash.\u00a0<\/span><\/p>\n<\/blockquote>\n
For AS, \u201ccash\u201d is the 3-month Treasury return.<\/p>\n
<\/a><\/p>\nFor this strategy, the dynamic bond<\/a> version is close to the standard variety.<\/p>\n
<\/a><\/p>\nMost of the stats are very similar.<\/p>\n
<\/a><\/p>\nThe only time an investor would have noticed the difference would be in 2022 when the dynamic bond<\/a> version only fell by 5.5% instead of 13.2%<\/p>\n
<\/a><\/p>\nConclusions<\/span><\/h6>\n
AS likes the strategy:<\/p>\n
\n
This is a simple, straightforward, effective approach to TAA. Yes, it\u2019s essentially trend-following and exhibits\u00a0high correlation to other \u201cclassic\u201d tactical strategies we track. This strategy may be worth considering as a component of a diversified Model Portfolio.<\/span><\/p>\n<\/blockquote>\n
I also like the strategy and will be allocating part of my portfolio to a variation on it (most likely with more asset<\/a> classes).<\/p>\n
- \n
- I also plan to revisit this idea in combination with classic momentum<\/a> in a later article.<\/li>\n<\/ul>\n
Until next time.<\/p>\n
- I also plan to revisit this idea in combination with classic momentum<\/a> in a later article.<\/li>\n<\/ul>\n
- They fix this by applying the same logic used for risk assets within a strategy to the defensive assets.<\/li>\n<\/ul>\n
- Which sounds pretty good to me.<\/li>\n<\/ul>\n
- But the volatility is 11% instead of 19%, and the Sharp ratio is 0.57 instead of 0.36.#<\/li>\n<\/ul>\n