The Average Investor's Blog

A software developer view on the markets

S&P 500 in the 50s

Posted by The Average Investor on Nov 14, 2010

Nowadays it’s a common knowledge that trend-following MA-based techniques can boost returns, at the same time lowering the risk.

What I found quite annoying, and what these articles are trying to fix, is that performance of such techniques is rarely shown in a realistic way. What do I mean by that? Let’s take as an example the S&P 500 total returns.

Relative price and total return of the S&P 500 index

Doesn’t this graph scream buy and hold?

At least in my opinion it does. However, how many of us have an investing horizon of 60 years? Furthermore, there a few places on the graph which indicate considerable pain for a potential investor, that is not easy to spot at first glance. For instance, in 1975 one would have had less money than in 1966! Not only that, but this would have been the second time this happened over 10 years – the situation is similar in 1971! Similar story after 2000. Now the real question – how many investors would have managed to close their eyes and continue with their investments?

To understand the pros and cons of MA techniques, my approach has been to split the historical data in chunks of equally long periods. Quite often I have used 10 years. Let’s take a look of three time frame MAs over 1950-1960:

Moving Average Annual Growth Trades Winning Trades Time In Max Drawdown
200 Day 12.78% 26 42% 59% 6.21%
20 Week 11.50% 26 53% 70% 6.16%
10 Month 14.93% 4 50% 49% 7.89%
Buy and Hold 13.65% 21.47%

So, what – the omnipotent 10 month MA is the winner again? The devil is usually in the details. For all the returns, I have excluded dividends. One reason is that I don’t have (or Yahoo Finance doesn’t provide) the dividend adjusted data for S&P500. It is also unfair IMO to use dividend adjusted returns for anything but for buy and hold.

Back to our discussion, considering that dividends were in the 5% range in the 50s, it is clear that buy and hold performed best. However, notice the drawdown. Following the buy and hold strategy, one should have been able to accept almost 22% losses from a previous peak! Knowing how I feel after losing 10% on a single trade, certainly it won’t be easy to not pull the trigger on a 22% of the entire portfolio.

The MA strategies certainly address the “pain” factor. The worst of them, 10 month MA, exhibits a drawdown of less than 8%.

Why the 10 month (and the buy and hold) performed so well?

Monthly S&P 500 with EMA(10)

Notice, that the first trade we made using the 10-month EMA was in 1953. If we have started at the beginning of the period, the performance would have been much better in this case. However, we don’t start trading until we receive the first signal – we have to draw the line somewhere.

All in all, in the 1950s we have had a trendy, growing market. Thus, MAs techniques have performed quite well, the less trading, the better. Thus, buy and hold and the 10 month MA performed best.


One Response to “S&P 500 in the 50s”

  1. […] The performance of various trend following strategies in the 60s was both similar and different from the performance of the same strategies in the 50s. […]

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