Hold less of the S&P 500 when the market has recently been turbulent, more when it has been calm. Over fifty-three years this cut the worst loss from three-quarters of the account to just over a third — while ending with roughly a quarter of the money.
Passed all six checks. Indicative performance of 5.4% a year is 2.5 points below the 7.9% returned by holding the same universe continuously, return for risk taken sits at 0.53 against the benchmark's 0.51, and the worst fall of 35.2% is 39.4 points below the benchmark's 74.6%.
Scaling equity exposure inversely to recent realised variance improves risk-adjusted returns, because volatility is persistent while expected return is not.
Turbulence comes in runs. A wild month is usually followed by another wild month. Returns are not nearly so obliging — a good month tells you little about the next one. So risk is partly predictable while reward is not, and a rule that leans on that asymmetry has something real to work with.
There is one number to set, and it is chosen from history as the strategy goes, never with hindsight. The cash it holds earns nothing here, which real cash would not. Both choices make the test harder than reality.
The advantage in return-per-risk is 0.53 against 0.51. That gap is far smaller than the uncertainty around either number. It is not an edge and is not claimed as one.
The drawdown difference is the result: 35% against 75%. The strategy visibly sidesteps 2000–02 and 2008, then underperforms through the low-volatility bull market of the 2010s, finishing at 19.6× against buy-and-hold's 76.9×.
This is a way of controlling risk, not a way of finding profit. The fair comparison is not the index itself but the index held in smaller size to match the same risk — a comparison this test cannot make, because its cash earns nothing and real cash does not.
| Measure | Value |
|---|---|
| Annualised return | 5.4% |
| Annualised volatility | 10.1% |
| Return for risk taken | 0.53 |
| 95% range | 0.26 to 0.81 |
| t-statistic | 3.87 |
| Maximum drawdown | 35.2% |
| Hit rate | 59.0% |
| Annual turnover | 3.86× |
| Return skew | (0.21) |
| Return kurtosis | 4.57 |
| Diagnostic | Value | Reads as | Bad | Okay | Yay | Hmm |
|---|---|---|---|---|---|---|
| Design half (pre-2015) | 0.49 | return for risk | ≤ 0 | 0 – 0.40 | ≥ 0.40 | |
| Holdout half (2015+) | 0.67 | return for risk | ≤ 0 | 0 – 0.40 | ≥ 0.40 | |
| Top-5-month share of profit | 18.2% | how much rode on a few months — lower is better | ≥ 40% | 25 – 40% | < 25% | |
| Top-2-year share of profit | 18.4% | concentration | — | — | — | |
| Distinct trading episodes | 1 | how many independent runs this really is | < 50 | 50 – 100 | ≥ 100 | |
| Chance the edge is real | 100.0% | non-normality corrected | — | — | — | |
| Chance it beats the whole search | 14.8% | chance of beating the whole search by luck | — | — | — |
| Check | What it asks | Result |
|---|---|---|
| 1 | Reward large enough for the risk | pass |
| 2 | Confidence range clear of zero | pass |
| 3 | Profit not concentrated in a few months | pass |
| 4 | Worked in both halves of the history | pass |
| 5 | Beat buying and holding | pass |
| 6 | Stood out from the whole search | pass |
| Year | Net return |
|---|---|
| 1973 | (11.6%) |
| 1974 | (13.6%) |
| 1975 | 6.8% |
| 1976 | 16.4% |
| 1977 | (12.4%) |
| 1978 | (1.2%) |
| 1979 | 8.2% |
| 1980 | 14.5% |
| 1981 | (9.8%) |
| 1982 | 6.7% |
| 1983 | 10.9% |
| 1984 | 0.8% |
| 1985 | 23.4% |
| 1986 | 2.8% |
| 1987 | 12.9% |
| 1988 | 4.7% |
| 1989 | 20.9% |
| 1990 | (8.0%) |
| 1991 | 13.4% |
| 1992 | 4.4% |
| 1993 | 6.8% |
| 1994 | (2.0%) |
| 1995 | 29.4% |
| 1996 | 16.2% |
| 1997 | 11.4% |
| 1998 | 8.5% |
| 1999 | 7.8% |
| 2000 | (9.3%) |
| 2001 | (11.6%) |
| 2002 | (12.3%) |
| 2003 | 12.9% |
| 2004 | 8.8% |
| 2005 | 0.6% |
| 2006 | 12.1% |
| 2007 | (0.2%) |
| 2008 | (14.9%) |
| 2009 | 8.4% |
| 2010 | 6.3% |
| 2011 | (0.8%) |
| 2012 | 9.6% |
| 2013 | 22.8% |
| 2014 | 9.1% |
| 2015 | (6.3%) |
| 2016 | 6.0% |
| 2017 | 17.8% |
| 2018 | (2.1%) |
| 2019 | 14.1% |
| 2020 | (4.7%) |
| 2021 | 18.3% |
| 2022 | (10.5%) |
| 2023 | 15.1% |
| 2024 | 18.4% |
| 2025 | 7.1% |
| 2026 | 3.6% |
| Measure | Value |
|---|---|
| Best years | 1995:+29%, 1985:+23%, 2013:+23% |
| Worst year | 2008:-15% |
| Symbol | Notes |
|---|---|
| S&P 500 — market index, in USD. | |
| Pathward Financial Inc. — listed on NasdaqGS, in USD. |
| Rev | Stage | Status | Change |
|---|---|---|---|
| 01 | Draft | — | Direction and criteria fixed before the experiment ran |
| 02 | Tested | Validated | Cleared every criterion |