High Returns, Low Risk: Unveiling a Winning Investment Strategy

21 nov 2023

I am pleased to introduce a robust long-term strategy that seamlessly combines performance with an enticing risk profile.

This strategy involves strategically investing in ETFs indexed on the S&P 500 and ETFs backed by physical gold. Let's delve into the rationale behind selecting these two assets:

S&P 500:

1. Automatic Diversification: Instant exposure to a diverse array of companies, mitigating the risk associated with the individual performance of a single stock.
2. Low Costs: ETF management fees are typically low, facilitating cost-effective diversification.
3. Liquidity: Traded on the stock exchange, S&P 500 ETFs offer high liquidity, enabling seamless buying or selling of shares.
4. Historical Performance: The S&P 500 has demonstrated consistent long-term growth, making it an appealing indicator for investors seeking sustained growth.
5. Ease of Access: Accessible to all investors, even those with modest investment amounts, requiring only a brokerage account.
6. Simple Tracking: The S&P 500 index simplifies market tracking, eliminating the need to monitor numerous stocks individually.
7. Dividends: Companies included often pay dividends, providing an additional income stream.
8. Long-Term Strategy: Ideal for investors pursuing a long-term approach, S&P 500 ETFs are pivotal for gradual wealth building.
9. Geographical Diversification: Investing in an S&P 500 ETF offers not just sectoral but also geographical diversification. Despite the U.S. base, many included companies have a global presence, contributing to international portfolio diversification.

Moreover, Warren Buffett's 2008 bet, where he wagered $1 million on the passive S&P 500 index fund outperforming active fund managers over a decade, underscores the difficulty even seasoned financial experts face in surpassing the market's long-term return. This further strengthens the notion that choosing an S&P 500-linked ETF can be a prudent and effective investment strategy.

Investment in Physical Gold ETFs:

1. Exposure to Physical Gold: Designed to reflect the price of physically held gold, providing direct exposure without the need for physical acquisition, storage, or insurance.
2. Liquidity: Traded on the stock exchange, physical gold ETFs offer high liquidity, allowing investors to buy or sell shares at prevailing market prices.
3. Diversification: Gold's unique reaction to market dynamics makes it a valuable diversification asset, potentially reducing overall portfolio risk.
4. Lower Costs: Compared to physically buying gold, investing in physical gold ETFs proves more cost-effective in terms of transaction costs, storage, and insurance. ETF management fees are also relatively low.
5. Transparency: Managers regularly publish reports detailing the gold quantity held, ensuring transparency about underlying assets.
6. Accessibility: Physical gold ETFs offer easy market access without the need for physical possession, appealing to investors avoiding gold storage and security management.
7. Gold-backed ETFs: These ETFs physically hold gold as the underlying asset, with investors often having the option to convert their shares into physical gold.

After extensive research and backtesting across diverse ETFs covering various asset classes, including bonds, real estate, commodities, and stocks of financially stable companies, my findings notably highlight a standout option during times of crisis: physical gold ETFs.

The strategy hinges on leading indicators, powerful economic tools.

Leading Indicators:
Leading indicators, or forward indicators, are crucial tools in economics and finance for anticipating future trends. In contrast to lagging indicators, which confirm existing trends, leading indicators provide early signals, aiding informed decision-making based on anticipated economic developments.

Key characteristics include:

Trend Anticipation: Early insight into upcoming changes in economic activity, facilitating preparedness for market developments.
Responsiveness: Quick reactions to economic changes, sometimes preceding other indicators.
Correlation with the Economy: Association with specific aspects of the economy, such as industrial production, consumer spending, or investments.

Examples include:

• Housing Starts: Providing early indications of the real estate market and construction investments.
• Net New Orders for Durable Goods: Indicating business investment intentions and insights into the manufacturing sector's health.
• US Stock Prices: Considered a leading indicator reflecting investor expectations.
• Consumer Confidence: Measuring consumer perceptions and influencing consumer spending.
• Purchasing Managers' Confidence and Factory Directors: Offering insights into production plans and future economic trends.
• Interest Rate Spread: Indicating economic expectations and influencing borrowing and investment decisions.

Returning to the strategy, I leverage entry points calculated by a meticulously developed strategy incorporating leading indicators applied to the SPY chart. The achieved performance of 3496% since 1993, with 15 closed trades, significantly surpasses a buy-and-hold position yielding 1654% in performance. Notably, the maximum drawdown is 5.44%, a stark contrast to the over 50% drawdown seen in an investment in the S&P 500.



Upon the indicators signaling the end of the long position, I close my SPY positions and transition to positions in physical gold ETFs.

In our example, choosing the GLD ETF yields a performance of 173%, adding to our total performance.



While the maximum drawdown, considering the addition of the investment in physical gold ETFs, is 17.65%, slightly higher than the drawdown on the strategy applied to the SPY, it remains impressive for such a prolonged period.

Now, if we conduct the backtest since 2007:


SPY : performance of 751 %, max drawdown of 4.02 %


GLD : Performance of 153 %

Since 2015:


SPY : performance of 131 %


GLD : Performance of 37 %


Disclaimer:
The information shared is for educational purposes only and is not financial advice. Investing involves risks, and past performance is not indicative of future results. Consult with a qualified financial advisor before making investment decisions. The author is not liable for any financial losses incurred.