Personal Investments • Tactical Asset Allocation - shift to stocks when market falls a certain amount

I thought about doing this a few years ago and even wrote something into our IPS. However, I decided not to implement the strategy since I wanted to maintain simplicity.

Our asset allocation goal is 70:30 but was wondering if we could juice our portfolio by moving to a 100:0 asset allocation after a US stock market decline.

I looked at Shiller's SP500 total return data from 1871 to 2020. I identified periods when the SP500 declined by 30% (10 periods), 40% (6 periods), and 50% (3 periods). I then identified the real total return (dividends reinvested and adjusted for inflation) 1, 2, 3, 4 and 5 years immediately after these periods.

There seems to be a positive correlation between the depth of decline and 5 year real total returns. The 5 year real total returns after these declines are higher (on average) than the average SP500 real total return... especially after a 40% or more decline. 5 year real total returns for the entire period from 1871 to 2020 were 48% (SD of 48%; n = 30), 43% after a 30% decline (SD of 46%), 57% after a 40% decline (SD = 39%), and 92% after a 50% decline (SD = 55%).

However, there are few independent observations... low group sizes in these data. As I said, I never implemented the strategy and removed it from my IPS.

Statistics: Posted by dogagility — Tue Jul 02, 2024 6:18 am — Replies 31 — Views 1974

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