Backtesting the Smart Blend strategy
Many people have a nest egg that they were able to accumulate over time and are on the lookout for a profitable investing strategy that is easy to implement and follow. Learning to invest in stocks ,ETFs ,options etc.. can be time-consuming so such a strategy that is easy to understand and follow is priceless to long term investors who are seeking an investment strategy to use in the US stock market.
Smart blend strategy falls into that category , in this article we explore this strategy along with its rational and backtesting results, this investment strategy is for long term investors who wish to participate in the market action but don’t have the time to engage with the market on a daily basis.
The trading frequency is one of the strategies main constraint so that long term investors can invest their money wisely.
This strategy requires about an hour per week at the beginning of every week to make decisions about the portfolio and should be left to trade for the rest of the week. This investment strategy is based on trading a list of uncorrelated assets, investing a portion of your portfolio each time the open criteria is met and closing a portion of it each time the exit criteria is met.
The Smart Blend strategy
Every Monday morning ( or whatever day of the week is better for you to trade), you plot the asset’s from the list (stocks and ETFs) to see which is above its 50 day moving average, if the asset is above its 50 day MA, you invest a constant 10% of the allocated fund in this asset.
In the opposite case that the asset is below its 50 day MA , you simply reduce the assets current size by 25% , removing a quarter of the current portfolio size of that specific asset.
That’s it.
You repeat the process every week making sure to increase the assets that are trending upwards and reducing position in assets that are falling.
Trading this strategy starting in 2005 until now have returned roughly 300% for the entire trading period (this correlates to an average of about 10% annually)
Max lose in the entire trading period is -17.14%
The risk-adjusted Sharpe ratio is 1.01
Detailed Results:
CAGR: 10.2% (Buy and hold = 8.8%)
MaxDD: -16.8%
# Trades: 1765(for the entire backtest period, 2-3 trades a week)
Win%: 68.3%
W/L Ratio: 4.13
PFactor: 3.74
Win Months: 62.7%
Loss Years: 3 (2008, 2016, 2018)
Figure 1-Smart Blend Strategy Returns
Figure 2-Smart Blend Strategy Drawdown
Strategy Analysis
The investment period starts at 01/2005 and ends in 10/2019, in that time period the S&P500 suffered one of its most dramatic declines in the 2008-2009 years , Smart Blend Strategy did not suffer such a dramatically decline because of its agility and the asset shifting feature which enabled the portfolio to gradually exit the declining assets and invest more in the appreciating assets, once the market rebounded , at mid 2009, Smart Blend Strategy shifted back into equity assets and joined the move to the upside. 2011 was another volatile year to equity markets, but not to the Smart Blend Strategy, again because once a decline is detected it causes the portfolio to shift away from equity into other assets until the market recovers and continues to the upside.
Beating the S&P500 is no simple matter, only 10% of professional traders are actually able to match the market performance and yet, this strategy is able to outperform the market in the 15 year period.
As you can see the strategy is moving alongside the market as long as the market is moving up, when real problems start for the market (like the 2008 meltdown) the strategy will make sure that the investor is gradually out of such a market and once things move back to normal ,join the upside.
Strategy Rules:
Entry
- Use this asset list : IVV,GLD,FB,AAPL,GOOG,EEM,UUP,EUO,TLT,SH
- Every Monday go over the list of assets and determine if the asset is above its 50 day MA
- If the asset is above its 50 day MA, add 10% of the funds allocated to this strategy into the asset’s existing investment.
Exit
- If the asset is below its 50 day MA, reduce 25% of current portfolio size
The strategy is design to be simple to manage and yet be profitable, the low frequency of trading makes sure the assets in the list has room for volatility and still leave the trader in the game, no bookkeeping is necessary since the trader uses fixed dollar amount for entry and 25% of the current size of the asset for exiting.
I hope this strategy will provide you with a simple yet powerful way to trade the equity and ETFs markets , as always be sure to allocate only the portion of your nest egg that you have initially planned to use for trading equities,
Trade safely,
Alon