Outperforming the market consistently over a long period backtest can be difficult task, many strategies perform well for certain sections of history and more poorly for other parts. Below we have devised a very simple strategy to slightly outperform the market, a simple growth and momentum switching strategy.
Funds: IVE [ISHARES S&P 500 VALUE ETF ] and IVW [ISHARES S&P 500 GROWTH ETF]
Rules: Invest in the fund (growth or value) that is performing the best over the last 3 months (3 month relative momentum) each month.
Results are shown below for switching between these 2 funds:
With this simple strategy we can see a small, but meaningful amount of outperformance of the S&P 500. But the next question we can ask is did it outperform the market for a longer period of time, with our long term backtesting data we can answer this question by applying the same rules to the Large Cap Value vs the Large Cap Growth Fund:
Overall this strategy outperforms the market for much of history, with the exception being the late 1930's and early 1940's.
Our next test will involve seeing if we can improve this simple strategy by adding the option to include large and mid-cap value and growth funds using the same backtesting rules but choosing 2 funds instead of just one.
Funds: IVE [ISHARES S&P 500 VALUE ETF ], IVW [ISHARES S&P 500 GROWTH ETF], IJK [ISHARES S&P MID-CAP 400 GROWTH ETF], and IJJ [ISHARES S&P MID-CAP 400 VALUE ETF]
Rules: Invest in the 2 funds that are performing the best over the last 3 months (3 month relative momentum) each month.
This simple addition of mid-cap value and growth results in quite a bit better performance than the benchmark (S&P 500). Again let us test the long term version of this strategy:
A large outperformance by this strategy in the long term, most of the years showing slight outperformance, a few years showing slight underperformance, and some of the years being very similar. A small outperformance of the market over the long term (from 1949 to today) resulted in 280,287% cumulative returns vs the market returns of 58,560%.
Improvement of this strategy may be possible, ideas like adding in a cash filter or an absolute momentum filter that switches to bonds when market conditions go south may improve results; also adding in one or two more funds to result in greater diversity (but still keeping it simple) could be a good route...
Members may test these strategies and make adjustments using the links below:
Link for Long Term Backtest with 2 Funds (Large Cap Growth vs Momentum)
Link for Short Term Backtest with 2 ETFs (Large Cap Growth vs Momentum)
Link for Long Term Backtest with 4 Funds (Large Cap Growth vs Large Cap Momentum vs Mid Cap Growth vs Mid Cap Momentum)
Link for Short Term Backtest with 4 ETFs (Large Cap Growth vs Large Cap Momentum vs Mid Cap Growth vs Mid Cap Momentum)
Keep in mind outperforming the market in historical results may or may not result in outperforming the market in the future.
Strategies presented anywhere on this site are ideas only, and only for education.
RotationInvest.com/PortfolioBuilderInvest.com do not provide investment advice, and are not investment advisors.