A Market Signal-Based Alternative to Buy-and-Hold Investing

Vol. 19, No. 3, 2021

Atanu Saha and Yong Xu

We propose a simple, hindsight-free, rule-based method of entry and exit into the stock market, with the goal of improving returns by averting large losses. Using data from 1928 through March 2020, we demonstrate that the proposed strategy delivers statistically significant outperformance over the S&P 500 total return index. Several robustness checks, including a Monte Carlo analysis, confirm the strategy’s outperformance in various sub-sample periods and investment horizons. These results hold after accounting for reasonable transaction costs for in and out trades. The strategy’s outperformance is explained by the non-normality and asymmetric persistence of market returns.