After a night sleep, I was able to make some surprising - to me - conclusions.
- 1972 to 2012: 100% TSM -> 100 becomes 4688
- 1972 to 2012: 100% TBM -> 100 becomes 2055
Equities are fatter better than bonds, nothing new. Now, an extreme timed approach:
- 1972 to 2012: 100% TBM and only 100% TSM when equities dropped 35% until they won 53,8% (= 1/0.65 - the inverse of -35%) relative to that point -> 100 becomes 5910
A few years in the stock market is far better than always in the stock market. Even though 1982 to 1999 was a pure goldmine for stocks, the timed approach still wins. We had 0% equity exposure during 1982 to 1999!
Let's try to explain this. According to Simba's spreadsheet, the CAGR of TBM was 7,65%. So, indeed, a portfolio of 100 after 41 years is:
100 * (1.0765^41) = 2054
This matches with the value above. So far, so good.
During the period from 1972 to 2012, there were 3 crashes of -35% (even more): 1972-1973, 2000-2002 and 2008. The market recovered all three times. This means we had three times the opportunity for an extra 53,8% if we went all in stocks after a drop of 35%:
2054 * (1 / 0.65) * (1 / 0.65) * (1 / 0.65) = 7479
This is not completely correct, since this still includes the gains from the bond market during these recovery periods. This explains the difference between 7479 and 4688 above. This is not easy to calculate, so let's ignore this for now. It doesn't change much to get the point of what I am trying to say.
The CAGR is now: 74.79 ^ (1 / 41) = 1.11 = 11%
According to Simba's spreadsheet, CAGR of 100% TSM was 9.84%. So, indeed, the timed approach wins, given the assumption made earlier. Because of that assumption, please do not look at the exact numbers, but think about the effect of three times 53,8%.
This example of course didn't say much, since no real sane person would go from 100% TBM to 100% TSM. However, it gives you a feeling why this approach might work.
In previous posts, I made a more interesting example: 1972-2012: 70/30 always <=> 0/100 and only 70/30 during recovery periods. In this approach, the risk of the timed portfolio was significantly lower, since equity exposure was much lower. Yet, this performs the same of even better. See http://www.bogleheads.org/forum/viewtop ... 1#p1751641
for results. We had 0% equity exposure during 1982 to 1999, the mother of recent secular bull markets, and still win in 2012! We had 70/30, a standard portfolio, during a small set of recovery periods.
A conclusion from these very basic tests is: a lot of money can be made during a recovery. Actually, it doesn't harm to be over weighed in bonds for most of the time (and therefore losing value because of lack of equities), if you have the guts to migrate to equities during a downturn. This doesn't necessarily mean that you have to go for 100%: 0/100 most of the time and 70/30 during recoveries doesn't yield worse than 70/30 all the time, but it's much less risky! Having guaranteed money to invest during a downturn is golden. Giving up equity exposure in favor of bonds during bull markets to be able to invest with as much as possible guaranteed money during a recovery, isn't a bad idea, surprisingly. Returns are the same or even better, but risk is much lower, due to decrease of equity exposure.
I am happy to run more tests if somebody wants me to. If somebody has links to downloadable/parsable data, I am happy to improve my application. I will try to implement rolling returns somewhere in the next days, so we can do more interesting tests.