Two weeks ago, a Forum member asked for some historical research to test his intriguing question: In the past, has an investor with a 70/30 portfolio as their standard asset allocation, who for an 18 month duration shifts their portfolio to 30/70 whenever the yield curve inverts, ended up with a better return than one who stuck with the 70/30 portfolio?
Since June 1976 (when the FRED inversion data starts) to December 2016, we have 40+ years that include five distinct yield curve inversion/recession events (including the double-dip inversions of the early 1980s, chart below):
Our test below uses S&P 500 and 10-year Treasury monthly returns, inflation-adjusted with dividends reinvested. Portfolio switches were made in the month following each yield curve inversion, and then held for 18 months. The full period results:
- 70/30 Constant Portfolio............6.73% CAGR
70/30 - 30/70 Switching............6.80% CAGR
Note: Chart shows 2-year rolling monthly returns.
Data sources: S&P stock returns from Shiller; 10-year Treasury returns from Medium
Honestly, I thought the benefits would be greater than just 0.07% CAGR. Looking over the chart, it appears switching helped a few times, it hurt a few times, and otherwise didn't matter. Overall, it hardly seemed worth the effort.