Simple Pair Switching Update

As of November 30, 2015, the "Simple Pair Switching" strategy has given a signal to switch allocations from bonds to stocks. The return for TLT (iShares 20+ Year Treasury Bond ETF) for the previous period is -1.2%, based on the adjusted close prices of August 13, 2015 and November 30, 2015.

SPY (SPDR S&P 500 ETF) would've returned +0.5% for the same period.

Cliff Smith's Low Volatility Bond Strategy

Cliff is at it again! He recently presented another interesting strategy utilizing municipal bonds, high yield bonds, mortgage securities and intermediate term U.S. treasuries. The strategy ranks the assets by their 10-day return (which is a lot shorter of a timespan than the often used period of several months). At the beginning of every month, as long as an asset is equal to or above its 10-SMA, the strategy invests in the top1 ranked asset. If no assets are equal to or above their 10-SMA, the strategy goes to / stays in cash (or very short term U.S. treasuries).

One can easily replicate Cliff's backtest on Portfolio Visualizer with the basket of OPTAX, FHYTX, FMSFX, DRGIX and CASHX, resulting in a CAGR of +11.62% and Max DD of -6.64% (1988-2015) or +11.34% / -5.60% (2000-2015).

One can find similar no load, no transaction fee funds at Fidelity and Schwab, yielding a similar (or actually better) performance with the basket of NHMAX, CPHYX, PTMDX, NEFLX and CASHX, resulting in a CAGR: +12.18% and Max DD of -2.92% (2000-2015). Instead of CASHX, one can use proxies SHY or SCHO. It is to be noted that the mutual funds have a 30-day minimum holding period.

The upside of this strategy is that it provides an amazing risk-to-reward ratio with a smooth equity curve and a very low maximum drawdown, assuming that it will continue to perform as it has for the last few decades.

The downside of this strategy is that for both Schwab and Fidelity, though there are no-load and no transaction fees on these funds, a redemption fee of $49.95 (when a fund is sold before 90 days) applies, so the strategy averaging about 7 trades a year, translates to it costing about $350 / year to run. On a $10,000 portfolio this translates to an annual cost of 3.5% and on a $100,000 portfolio 0.35%, so it's definitely not cheap on smaller accounts.

As usual, I've created a dynamic spreadsheet to follow this strategy, or one can use Portfolio Visualizer as well.


QH Low Volatility Bond

Cliff Smith's Vanguard High Growth Strategy

It's been a while since I've presented any new strategies, since it's been tough to find rotation strategies that have previously worked well, and are still exhibiting good returns in 2015.

Cliff Smith recently presented a strategy on Seeking Alpha that he calls "Vanguard High Growth Strategy", which can be easily backtested on Portfolio Visualizer from 1988-2015 (1987-2015 without the comparison to the S&P 500), yielding a +15.10% CAGR and -9.09% Max Drawdown with a very smooth and stable equity curve. There are no losing years, the worst return was +2.66% in 2001. The strategy is based on 4 Vanguard mutual funds, which basically means that for the strategy to work efficiently and to avoid commissions, one should have an account with Vanguard.

The selected funds are Vanguard Convertible Securities Fund Investor Shares (VCVSX), Vanguard High-Yield Corporate Fund Investor Shares (VWEHX) and Vanguard Health Care Fund Investor Shares (VGHCX). The strategy stays invested in the selected assets (equal weight) when the monthly adjusted close price of an asset is greater or equal to its 2-month EMA. If not, the specific portfolio slice is invested in Long-term U.S. Treasuries (VUSTX).

One should note that the Vanguard mutual funds have a 30-day minimum holding period. One can use Portfolio Visualizer to track the portfolio investments at the end of each month, and I've also created a dynamic Google spreadsheet for this strategy. It'll be interesting to see if this strategy can maintain as smooth an equity curve as it has over the last almost 3 decades.

QH Vanguard High Growth Spreadsheet