Investment strategy 8: Relative strength investing using Gold and US Stocks

The investment strategy in this post is : Relative strength investing using Gold and US Stocks.

Let us say we are going to use the S&P 500 for Stocks. The S&P 500 is often called the market. You can easily invest in this index using an index fund or ETF like Vanguard S&P 500 ETF

You can easily invest in Gold  using SPDR Gold Shares ETF.

The premises behind this investing strategy are:

  • Stocks are very good investments in the long run. But they go through rough patches when there is a lot of financial uncertainty.
  • Gold is not a very good investment over the long run. But it does very well when there is financial uncertainty
  • Momentum works

The strategy is as follows:

  • Calculate the total return for the S&P 500 over the last year. Calculate the total return for Gold over the last year.
  • Invest in the best performing asset the following year.
  • Repeat every year.
  • This is best carried out in a non-taxable or a tax deferred account

You can see the data in this spread sheet.

The returns are as follows:

  • Annualised return 1972-2012:                16.2%
  • 1 year rolling return:                                        -27.62%- 125.65%
  • 3 year rolling annualised return:                      -6.3%- 52.3%
  • 5 year rolling annualised return:                      -0.07-32.27%
  • 10 year rolling annualised return:                     8.1%-25.7%
  • 15 year rolling annualised return:                     8.8%-23.6%
  • 20 year rolling annualised return:                     11.5% – 17.4%
  • 25 year rolling annualised return:                     12%-17.7%
  • 30 year rolling annualised return:                     13.1%-16.8%
  • 35  year rolling annualised return:                    15.2% – 16.8%
  • 40  year rolling annualised return:                    16.2%

The annualised return for the S&P 500 from 1972-2012 is 9.5%
The annualised return for Gold from 1972-2012 is 8%

So you can see this is a strategy with very good returns in the past if you are investing for the long term(10 years or more). It outperforms the S&P 500 by 6.7% per year which is a remarkable achievement. It is a bit volatile, but as Buffet says:

Charlie and I would  much rather earn a lumpy 15% over time than a smooth 12%.