R Faber model trade stats

cagr   0.07370385 0.04863027

volat  0.06720597 0.15948145

sharpe 1.09668602 0.30492742

maxdd  0.11335030 0.56876409

1st column is using the market timing mechanism mentioned on Faber’s paper, 2nd column is simple buy and hold on the S&P. Sharpe is calculated with a risk free rate of 0%. Looks like it trounced B&H; however, there’s still room for improvement. Eg the B&H Sharpe on bonds is not that much worse at 0.95, and the CAGR is slightly better by 0.6%. Additionally, market outperformance in the short term is far from optimal: for example, YTD, the timing model had a -3.2% return, while you would’ve earned almost 14% buying and holding 10-year Treasuries, and about break even buying and holding the S&P. Obviously the fixed 20% allocation isn’t the best. Perhaps dynamic allocation based on momentum, volatility, and correlation (to each other) would help.

Leave a Reply

Your email address will not be published. Required fields are marked *