Login below to view the full article
Abstract
This article shows that dynamic investment portfolio asset allocation based on secular market cycles outperforms a buy-and-hold portfolio of equities and outperforms a buy-and-hold portfolio of gold over long periods. An objective definition of secular market enables identification of an appropriate ex-ante risk-on or risk-off posture for a portfolio. The author constructs an objective measure, which is termed a “secular market indicator (SMI),” using a modified Shiller Cyclically-Adjusted Price Earnings (CAPE) ratio with gold as a reference point. This SMI has slightly greater predictive power than Shiller's CAPE Ratio in that it provides a consistent threshold signal for secular macroeconomic reversals. Finally, the author uses the SMI to create a simple decision rule to shift asset allocation between equity and gold depending on the secular market cycle. The resulting portfolio outperforms an all-equity portfolio and an all-gold portfolio over holding periods of 10+ years about 70% of the time and produces superior risk-adjusted performance about 80% of the time.
- © 2018 Pageant Media Ltd
Don’t have access? IPR Journals is the leading provider of applicable theoretical research for all those in the investment management community. Benefit from access to our content including:
|