Numerous studies show how low beta investment strategies have outperformed relative to high beta. Data from Eric Falkenstein’s site illustrates this over the last 50 years:
However, there are clearly periods when high beta returns are higher (for example the 1990s). What if we switch monthly to the strategy with the highest return in the previous month?
$1 now returns $1000, or 15% annually, up from 12%.
This test is frictionless, with switches occurring approximately every 2 years. (Testing is ongoing). Currently SPLV and SPHB could be employed; of course these instruments are only recently available.
The next post looks at combining these returns with the RecessionAlert model to see whether they can be improved.