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I have updated the model described in my article, Seeking Beta in the Bond Market: A Math-driven Investment Strategy for Higher Returns, which appeared on November 23, 2010.
Figure 7 from the article, included below, shows the upper and lower switch points for the Bond Value Ratio obtained from the model from 2006 through 2010. A lower switch point was generated on 12/17/2010. This indicates the beginning of an up-market for bonds, according to the model.
According to my models, both the stock market and the bond market are now in an up-market mode and the question arises how one should apportion one’s funds for investing in each market.
In table 1 below, mix 3 and mix 4 show the returns for investments in the bond market using high beta bond funds (VUSTX or BTTRX) in combination with the Vanguard S&P 500 Index fund VFINX. All fund values were indexed to a value of 100.00 as of 1/12/1990 to facilitate comparison of returns. The results for mix 3 and mix 4 are based on 100% invested in the bond funds during up-markets and then switching to the stock market during down bond markets. Table 2 shows the average annual returns achieved.
Table 1
Returns for investments in bond market funds in combination with a stock market fund
|
Bond market |
Bond market |
switch point date |
months btw. switch points |
value VFINX |
value VUSTX |
value BTTRX |
%-return for each month VFINX |
%-return for each month VUSTX |
%-return for each month BTTRX |
value mix3 = VFINX + VUSTX |
value mix4 = VFINX + BTTRX |
|
|
down |
|
1/12/90 |
|
100.00 |
100.00 |
100.00 |
|
|
|
100.00 |
100.00 |
sell bonds, buy stock |
|
up |
5/4/90 |
3.68 |
102.17 |
96.25 |
96.25 |
0.58% |
-1.03% |
-1.03% |
102.17 |
102.17 |
sell stock, buy bonds |
||
down |
3/12/93 |
34.29 |
158.83 |
144.15 |
144.15 |
1.30% |
1.18% |
1.18% |
153.01 |
153.01 |
sell bonds, buy stock |
||
up |
7/14/94 |
16.07 |
165.77 |
147.02 |
147.02 |
0.27% |
0.12% |
0.12% |
159.70 |
159.70 |
sell stock, buy bonds |
||
down |
10/23/95 |
15.32 |
220.96 |
180.23 |
180.23 |
1.89% |
1.34% |
1.34% |
195.77 |
195.77 |
sell bonds, buy stock |
||
up |
9/12/96 |
10.68 |
258.70 |
176.78 |
162.29 |
1.49% |
-0.18% |
-0.98% |
229.21 |
229.21 |
sell stock, buy bonds |
||
down |
12/30/97 |
15.58 |
382.83 |
213.46 |
238.88 |
2.55% |
1.22% |
2.51% |
276.77 |
337.40 |
sell bonds, buy stock |
||
up |
1/24/00 |
24.82 |
568.65 |
221.54 |
229.97 |
1.61% |
0.15% |
-0.15% |
411.10 |
501.16 |
sell stock, buy bonds |
||
down |
11/14/01 |
21.70 |
635.74 |
292.75 |
336.70 |
0.52% |
1.29% |
1.77% |
543.25 |
733.77 |
sell bonds, buy stock |
||
up |
3/26/02 |
4.34 |
639.89 |
274.54 |
294.43 |
0.15% |
-1.47% |
-3.04% |
546.79 |
738.55 |
sell stock, buy bonds |
||
down |
5/28/03 |
14.07 |
763.03 |
346.92 |
414.34 |
1.26% |
1.68% |
2.46% |
690.95 |
1039.35 |
sell bonds, buy stock |
||
up |
8/7/03 |
2.33 |
782.00 |
321.40 |
347.51 |
1.06% |
-3.22% |
-7.26% |
708.14 |
1065.20 |
sell stock, buy bonds |
||
down |
2/11/05 |
18.21 |
991.57 |
369.59 |
471.97 |
1.31% |
0.77% |
1.70% |
814.31 |
1446.70 |
sell bonds, buy stock |
||
up |
5/18/06 |
15.15 |
1061.10 |
360.05 |
439.27 |
0.45% |
-0.17% |
-0.47% |
871.42 |
1548.15 |
sell stock, buy bonds |
||
down |
12/31/08 |
31.49 |
1372.19 |
518.30 |
676.06 |
0.82% |
1.16% |
1.38% |
1254.42 |
2382.69 |
sell bonds, buy stock |
||
up |
12/30/09 |
11.97 |
1930.52 |
455.87 |
537.57 |
2.89% |
-1.07% |
-1.90% |
1764.83 |
3352.18 |
sell stock, buy bonds |
||
down |
8/27/10 |
7.89 |
2021.38 |
534.38 |
680.71 |
0.58% |
2.03% |
3.04% |
2068.79 |
4244.75 |
sell bonds, buy stock |
||
up |
12/17/10 |
3.68 |
2128.61 |
487.65 |
608.92 |
1.41% |
-2.45% |
-2.98% |
2178.53 |
4469.93 |
sell stock, buy bonds |
||
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Table 2
Average annual returns for investments in bond market funds in combination with the stock market fund VFINX and for an investment in S&P500 index fund VFINX alone.
|
Investment period |
average annual return for VFINX |
average annual return for mix3 = VFINX + VUSTX |
average annual return for mix4 = VFINX + BTTRX |
||
|
|
|
|
|
|
5/4/90 |
- |
12/17/10 |
15.85% |
15.98% |
20.09% |
7/14/94 |
- |
12/17/10 |
16.80% |
17.23% |
22.47% |
9/12/96 |
- |
12/17/10 |
15.91% |
17.09% |
23.14% |
1/24/00 |
- |
12/17/10 |
12.87% |
16.52% |
22.22% |
3/26/02 |
- |
12/17/10 |
14.75% |
17.15% |
22.89% |
8/7/03 |
- |
12/17/10 |
14.56% |
16.48% |
21.49% |
5/18/06 |
- |
12/17/10 |
16.39% |
22.11% |
26.01% |
12/30/09 |
- |
12/17/10 |
10.66% |
24.41% |
34.77% |
- Investment in bond market funds VUSTX and BTTRX is according to the signals from "Seeking Beta in the Bond Market".
- For mix 3 and mix 4: only when down bond markets occur is an investment made in S&P500 index fund VFINX (with dividends re-invested).
- Investment in S&P500 index fund is according to signals from "Improving on Buy and Hold".
The historic values shown in table 2 demonstrate that an investment using the combination represented by mix 3 achieved the highest returns. The returns are significantly better than an investment in the stock market index fund alone.
