Morningstar Sees The Light

Really interesting paper from Morningstar ETFInvestor. If you are not a subscriber, Meb Faber has made it available here. The author of the paper, Samuel Lee, applies a simple moving average crossover approach to six separate strategies. The conclusions were powerful:

In virtually every equity, currency, and commodity index we tested, moving-average-based timing schemes reduced drawdowns without sacrificing return (in many cases improving it). The improved risk-adjusted returns can’t be explained by the increased average exposure to cash or to a few anomalous periods.

A moving average crossover signal is not a predictor of anything, it is a risk management device. One of the most effective ways to improve performance, as demonstrated by this paper (and many others), is to avoid ghastly drawdowns. This isn’t about trying to time tops and bottoms, it’s about avoiding most of a downtrend and capturing most of an uptrend. Definitely worth a read.