A Quantitative Approach to Tactical Asset Allocation
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What they found
Faber tested the simplest possible timing model: hold an asset class when its monthly close is above its 10-month simple moving average, otherwise hold cash. Applied to U.S. stocks, foreign stocks, bonds, real estate, and commodities from 1973 to 2005 (and to the S&P 500 back to 1900), the rule produced returns similar to buy-and-hold with much lower volatility and far smaller drawdowns, because it sidestepped most of the large bear markets. This paper became the template for many retail trend-following approaches.
What you can use
- A single monthly moving-average check across a few asset classes historically cut maximum drawdown roughly in half.
- The rule does not increase returns much; its value is risk reduction and avoiding catastrophic bear markets.
- Monthly signals with a handful of trades a year are within any retail trader's cost and attention budget.
Caveats
Not peer-reviewed at a top journal and written by a fund manager who sells the strategy. The rule's benefit depends on a small number of big bear markets; it underperforms in choppy, sideways periods and has lagged since 2009.
Tags: technical-analysis, moving-average, tactical-allocation, beginner-friendly
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.