Improving on Buy and Hold:
Tactical Asset Allocation
Mebane Faber
March 3, 2009

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Testing across asset classes

Given the ability of this very simplistic market-timing rule to add value to various asset classes, it is instructive to examine how the returns would look in the context of an investor’s entire, diversified portfolio.  The returns for a buy-and-hold allocation are equally weighted and rebalanced monthly across the five asset classes described above:  the S&P 500, the Morgan Stanley Capital International Developed Markets Index (MSCI EAFE), Goldman Sachs Commodity Index (GSCI), National Association of Real Estate Investment Trusts Index (NAREIT), and United States Government 10-Year Treasury Bonds.  The timing model treats each asset class independently – it is either long a particular asset class or that class’ 20% allocation of the funds is in cash.

Figure 3 below shows the results of buying and holding the five asset classes equally weighted and of using the timing portfolio.  The buy-and-hold returns are quite respectable on a stand-alone basis and exhibit the benefits of diversification.  The timing approach reduces volatility to single-digit levels, and it holds drawdowns to single-digits as well. The investor’s funds are almost always 60-100% invested.

Figure 3: Asset allocation buy-and-hold vs. timing model, 1973-2008

Returns for 2006-2008 are not included in this sample because my original paper was published in early 2006, and that data ended in 2005.  The results in this article include the post-publication years of 2005-2008.  Last year was one of the strongest relative outperformances for the timing model — it was up 1.6% while the buy-and-hold allocation was down 30%.

This approach can also be extended by applying leverage to generate excess returns.  Figure 4 shows the equity curves for the two timing models (leveraged and non-leveraged) and for the S&P 500.

Figure 4: S&P 500 vs. timing model and leveraged model, 1973-2008

The two-times leveraged model does not produce double returns, because the investor must borrow funds to finance his leverage at the broker call rate, but it does outperform the buy-and-hold portfolio by over 500 basis points with lower drawdowns. Its volatility, however, is higher at approximately 14%.  .

Figure 5 below shows an example of easily tradable ETFs for each of the five asset classes.

Figure 5: ETFs

US Stocks


Foreign Stocks


US Govt Bonds








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