Campbell Harvey, a finance professor at Duke University, best known for developing the yield-curve recession indicator, is known for his pound record in predicting recessions.
In a new article he co-wrote with Edward Hoyle, Sandy Rattray and Otto van Hemert of hedge fund giant Man Group, Harvey points out a 60/40 – 60% portfolio in stocks, 40% in bonds. – not a completely passive strategy.
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“We argue that rebalancing is a proactive strategy, because assets are sold after they increase in value and bought when they fall in value. They say: Buying (rebalancing) when the stock is in a downtrend will lead to a larger price drop.
A rule the authors have advocated previously only calls for a rebalance if the 1-month, 3-month, or 12-month trend in an equity bond’s relative return is above its long-term historical average. . Furthermore, it is advisable to only move half the distance back to the 60/40 mix, they advise.
Compliance with the rebalancing rule would limit the first quarter’s 60/40 portfolio decline to 7.2% or 7.4%, compared with an 8% decline in the automatic rebalancing.
“The impact of this rule is not as great as it was in the 2007-2009 financial crisis (it was about 5 percentage points then), when stocks experienced gradual and greater inefficiencies. But the strategic rebalancing rule reduced the decline of Q1 2020, despite the suddenness of the crisis, ”they said.
Also see:Vanguard protects a 60/40 portfolio when forecasting stock market returns for the next decade
The same article also examines which strategies work most effectively in the exit process. Previously, they argued that buying put options was extremely expensive during the normal period and gold was unreliable.
Motivational strategy, what Man Group EMG,
is known for performing best in the sell-off.
Another interesting finding is that so-called safety strategies – strategies that target companies with stocks that do not fluctuate strongly or do not have much debt – do not perform well.
“This is similar to the 2007-09 Financial Crisis. We believe this is due to tightening credit conditions. For example, if leverage is used to boost returns on low-risk stocks, then an increase in borrowing costs can damage both additional upfront costs and indirectly by forcing the position, ”said the authors.