Simple Bond Strategy Soon to Switch

  • SumoMe

Please note that the title includes the word “Simple” but does NOT include the words “Best”, “Infallible”, “World”, “Beater”, nor “You”, “Can’t” or “Lose”. The strategy discussed was first written about here and the mechanics remain unchanged.

See also Uptrend/Downtrend (and Sideways Trend))

This simple system has three things going for it:

*It’s simple

*It takes advantage of some very persistent seasonal trends

*It has a pretty consistent track record

The System

In general:

*The system (attempts to) take advantage of the typical strength in the stock market from December through April and the typical strength in the bond market from May through November.

*Junk bonds have a higher correlation to the stock market than they do to treasury bonds

*GNMA bonds tend to be less volatile than longer-term treasury bonds

So, the rules are as follows:

*December through April hold VWEHX

*May through November hold VFIIX

VWEHX is the Vanguard High Yield Corporate Bond Fund

VFIIX is the Vanguard GNMA Fund

Figure 1 below displays the growth of $1,000 invested in each fund since 1980 ONLY during the months of December through April (All data in this article is generated using Monthly Total Return Data from PEP database from Callan Associates).1Figure 1 – Growth of $1,000 in VWEHX (blue) versus VFIIX (red) ONLY during December through April; 7/31/80-3/31/17

*During the months of December through April VWEHX gained +472% versus +127% for VFIIX.

Figure 2 displays the growth of $1,000 invested in each fund since 1980 ONLY during the month of May through November.2Figure 2 – Growth of $1,000 in VWEHX (blue) versus VFIIX (red) ONLY during May through November; 7/31/80-3/31/17

*Between the months of May through November VFIIX gained +508% versus +250% for VWEHX.

Figure 3 displays the growth of $1,000 invested using the switching rules detailed earlier versus “splitting” $1,000 between VWEHX and VFIIX and holding both.3Figure 3 – Growth of $1,000 invested using “Switch” Strategy versus “Splitting” the money between VWEHX and VFIIX and holding; 7/31/80-3/31/17

Since 11/30/2017:

*VWEHX is up +3.6%

*VFIIX is up +0.3%

More importantly, since July 1980:

*The Switch System has an average 12-month gain of +10.8% with a maximum drawdown of -9.3%.

*The “Split” System has an average 12-month gain of +8.5% with a maximum drawdown of -13.5%

(See also Four Things to Watch for Warning Signs)

Summary

So is this “World Beater” of all bond trading systems?  Hardly.  Additionally, with concerns of higher interest rates it is fair to wonder how GNMA bonds will perform during the “seasonally favorable” months of May through November in a rising rate environment.

But this system does meet two criteria of any decent investment or trading method:

*It takes advantage of an “edge” (seasonality in the stock and bond markets)

*It’s simple.

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

3 thoughts on “Simple Bond Strategy Soon to Switch

  1. Jay,
    I have tried to re-create the above strategy including dividends but the returns are far lower than what is suggested here. I’m using Yahoo EOD quotes.

    What data are you using?
    Aengus

    1. Aengus, I am using monthly total return data from the PEP Database compiled by Callan Associates. FYI I also use Yahoo data for certain types of analysis. My experience has been that using “Adjusted Closing Price” (which supposedly includes distributions/dividends/etc. does not always (or even typically) match the comprehensive database listed above. Not really sure why that is the case. Take Care, Jay

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