Is Buy and Hold the best strategy?
Buy and hold S&P 500 (SPY) has proven to be a successful strategy, as few active money managers can beat the long term performance of this strategy. However, it has no downside protection. When market declines, it is easy to lose faith. Emotion and anxiety may take over, leading to poor performance.
To address this and other limitations, PhD smart investing developed several effective investment models. These models are supported by back testing with 20 years of historical market data. They went live on TimerTrac in 2016 and are continuously being monitored by this independent tracking service. These models exceed or match the performance of S&P 500, while providing significantly less price fluctuation.
These models are based largely on trend following. They manage to be in the up market while out in the down market. These models are designed for investing using popular ETFs, index funds, or diversified mutual funds. They are easy to implement and can be used for retirement accounts.
These models are for pursuing academic curiosity satisfaction, not investment advice. Please consult a professional adviser for investment advice.
Investment Models
The main model is the classic model. It rotates among cash, SPY, QQQ, MDY, EFA, VTV, and other popular ETFs (or their equivalents), depending on the market conditions. It is of intermediate trading frequency.
The Freedom model is speculative and involves more judgment calls. Its methodology is still undergoing significant development.
PhD smart also maintains other models for special purposes. These models are similar in strategy and performance to the classic model. For example, a TSP model is designed for the Federal TSP (Thrift Savings Plan), with its limited investment choices and trading restrictions in mind.
Performance (updated Jan 2023)
For comparison, the hypothetic performance of buy and hold SPY, trading SPY using the timing signal, and the classic model (using both timing signal and ETF rotation) is shown in Figure 1 and Table 1. It is clear the timing signal avoided the major market drops in 2008 and 2020. The classic model clearly outperforms buy and hold SP500. While trading SPY is not as good as the classic model, it still provides significant market drop protection.
Back testing is difficult to do for the Freedom model. However, the live results (verifiable by Timertrac) are outstanding. Since inception on 2/29/2016 to 2/12/2021, the total return is almost 80% (178% versus 98%) higher than buy and hold S&P500.
In these hypothetic performances, commission and possible switching costs were not considered, which may lower the performance. Dividend was treated using adjusted daily closing prices. However, trading may miss dividend payment, which may lower the overall performance. For taxable accounts, most returns will be short term, which will reduce the effective return significantly when compared to buy and hold. Implementation variation may also change the performance. Past returns are no guarantee for future performance. See the next tracking section for more information.
Independent tracking
These hypothetic performances are largely based on back testing. However, some key elements of these models were developed in 2014 and two models went live on TimerTrac since early 2016.
The classic model went live on TimerTrac on 1/16/2016. Up to 2/19/2021, only the asset allocation component of this strategy was tracked by TimerTrac. Starting on 2/19/2021, both the asset allocation and specific asset rotations were tracked by TimerTrac (Timertrac can track portfolio performance with the Graphs function, using the default asset selection). The Freedom model went live on 2/29/2016. Click the following medallions to see the independent tracking on TimerTrac.
Classic
Freedom
The performance on TimerTrac differs from the hypothetic performance mentioned above due to a number of factors. The main reason is the evolving nature of the model development and tracking difference. For example, for the classic model, only the timing allocation part was tracked on TimerTrac prior to 2021. The asset rotation went through several revisions in recent years and the hypothetic performance is based on the latest rotation method. The implementation variation also influences the performance. Despite these complications, these live models all performed well, as they achieved the goal of good return with significantly lower volatility, as compared to buy and hold SP500.