Since 1970, when International equity data became widely available thanks to the MSCI EAFE index, a portfolio invested in Time Averaged Dual Momentum (TADM) would have substantially outperformed its individual components.
TADM has outperformed the U.S. stock index by about 6% per year; it outperformed International stocks by around 7% per year; and it outperformed bonds by nearly 10% per year.
My Time Averaged Dual Momentum model would have outperformed a buy-and-hold indexing portfolio of these three components, equally weighted and re-balanced annually, by roughly 7% per year. With a lot less volatility and lower drawdowns.
Picking the Right Investment at the Right Time
The reason TADM has stellar performance, beating its own components, with minimal drawdowns is because it (in a rough sense) picks the right asset to be invested in at the right time.
When U.S. stocks are beating International stocks and bonds, TADM will often have you entirely invested in U.S. stocks. We saw this happen in the period of 1995 through 1999 where TADM would have your entire portfolio invested in U.S. stocks in all but three months during this time.
Likewise, in the period of 2003 through 2007, when the investment world was buzzing around resources, peak oil, copper booms, the BRICs, and European property prices, TADM would have your entire portfolio invested in International stocks.
You would also been invested entirely in International stocks in the late 1970s and in the mid 1980s.
Just as importantly, Time Averaged Dual Momentum helps you avoid the worst of those long downturns in equity markets. You would have moved to bonds at the end of 1973 and until early 1975, again in 1981-1982, also for the bulk of the 2000-2003 crash, and finally in 2008-2009.
Achieving positive returns in your portfolio while equity markets are getting slammed is a huge advantage!
The biggest drawdowns in TADM occurred during the 1973-1974 correction and the 2008-2009 market crash.
In both of these huge events, your total drawdown would have been around 20%. (The exact drawdown is just a best estimate as bond return data is hard to obtain for the 1970s.)
A 20% decline sounds like a lot, but don't forget that U.S. stocks and International stocks dropped well over 40% during these market events, sucking down buy-and-hold index portfolios with them.
Over the course of an entire bear market, my Time Averaged Dual Momentum strategy handily beats a buy-and-hold approach. In nearly every bear market event, the TADM strategy would have smaller and shorter drawdowns compared to a passive buy-and-hold index portfolio.
To get a visual of how Time Averaged Dual Momentum performs compared to an annually re-balanced equal weight portfolio, here's a logarithmic chart for the backtest period.
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