As with many things in life sometimes it is helpful to question why you do the things you do. After a torturous 18 months in the markets, I decided it was time to look at my investment strategy and question if I could refine it. As any reader knows I follow trends in the market and rely heavily on the 50 and 200 day EMA. While I have long recognized the value of the crossover of the two averages (also known as the Gold Cross), I have never considered its utility as part of a strategy until now.
Approaches Analyzed
The purpose of the study is to determine which strategy has the highest return, lowest volatility, lowest drawdown, and highest cumulative return. In this study the Vanguard 500 Index Fund’s (VFINX) pricing was used from 1/1/1989 to 12/31/2009 (21 years). Dividends were reinvested in each strategy. Since there was no exchange-traded fund 21 years ago VFINX was used but trading costs of $10 for each buy and sell were entered. Taxes were not considered. The starting balance was $2689 for each strategy.
The following are an outline of each approach:
- Buy and Hold – as simple as it sounds
- 200 day EMA – If the fund closed below the 200 day EMA it was sold and if it went above its 200 day EMA it was bought
- Gold Cross – If the fund’s 50 day EMA went below its 200 day EMA it was sold and re-bought when its 50 day EMA went above its 200 day EMA.
- Out on Gold Cross / In over 200 EMA – If the fund’s 50 day EMA goes below its 200 day EMA (Gold Cross) the fund is sold when the fund goes above its 200 day EMA it is bought.
- Out under 200 day EMA / In on Gold Cross – If the fund goes below its 200 day EMA it is sold. If the fund’s 50 day EMA crosses over its 200 day EMA (Gold Cross) it is bought.
Results
| Stat | Buy & Hold | 200 Day EMA | Gold Cross | Out Gold Cross/ In 200 EMA | Out 200 EMA / In Gold Cross |
|---|---|---|---|---|---|
| Begin Value | $2,689 | $2,689 | $2,689 | $2,689 | $2,689 |
| End Value | $16,955 | $30,660 | $19,102 | $24,001 | $30,240 |
| St. Deviation | 19.38% | 13.75% | 14.13% | 15.24% | 11.89% |
| ’00-’02 Draw Down | 47.40% | 5.80% | 8.30% | 9.30% | 6.40% |
| ’08-’09 Draw Down | 56.10% | 11.40% | 9.10% | 8.70% | 2.20% |
| Cumulative Return | 634% | 1,177% | 715% | 926% | 1,146% |
| # of Trades | 1 | 36 | 10 | 17 | 28 |
| Profitable Trades | 1 | 18 | 6 | 8 | 24 |
| % Trades Profitable | 100% | 50% | 60% | 47% | 85% |
Source: Sustainable Investment Strategies, LLC Prices by Yahoo Finance
The final column outlines the 2nd highest total return, lowest standard deviation, 2nd lowest dot com drawdown, lowest ’08-’09 drawdown and second highest percentage of profitable trades. Seems to me that the combination of getting out at the 200 day EMA and going back in at the Gold Cross achieves the desired results.
Disclosure Statement: ETFGPS is a blog that Navigates The World of ETFs. Sustainable Investment Strategies LLC is a Registered Investment Adviser in the State of Maryland, and does not hold positions in ticker VFINX at the time of writing. Investors who are interested in money management services may visit the Sustainable Investment Strategies LLC web site
