Most Popular ArticlesJune 16, 2009
My assumptions
To keep things simple, I made three assumptions:
non-interest-bearing cash.
2. No transaction fees.
3. No taxes.
The first assumption penalizes MAC in favor of buy-and-hold. Parking proceeds in Treasury Bills would obscure the central focus of my study because short-term interest rates varied widely throughout history.
The second assumption has a small positive bias toward MAC. But fees on index funds and ETFs (which I assume, for the purpose of my analysis, have been around since the Civil War) are less than 10 basis points and will not significantly affect my results.
I exclude tax effects for several reasons. First, tax rates vary with income levels. Second, top marginal tax rates changed dramatically in the past 138 years, from below ten percent before 1910 to above ninety percent in the 1950s. Third, buy-and-holders are not exempt from tax; tax payments are merely deferred. When they eventually sell their holdings, their entire cumulative gains will be taxed. Ignoring taxes is a balanced compromise, and does not give the MAC system an unfair advantage.
I will revisit the fee and tax assumptions after presenting my results.
Let the contest begin: MAC versus buy-and-hold
To compare performance between MAC and buy-and-hold, I used Compound Annual Growth Rates (CAGRs) and 138 years of monthly data for the S&P500 total return index (with dividend reinvestment) from 1871 to 2009. I examined a wide range of MA lengths, from two to twenty-three months.
The buy-and-hold benchmark returned 8.6 percent over this period, and is represented by the red bar in Figure 2. The green bars represent the CAGRs for different moving average lengths. CAGRs below 11 months consistently beat buy-and-hold. Above that, they reach diminishing returns. The quasi bell-shaped curve suggests that the distribution is not random.
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