Transcription

• Speaker #0

  Hello, welcome back to Papers with Backtest podcast. Today we dive into another algo trading research paper.

• Speaker #1

  Looking forward to it.

• Speaker #0

  All right, we're going deep on a paper called When to Own Stocks and When to Own Gold. This research by Timothy Peterson caught my eye because it tackles a classic dilemma, stocks versus gold. When to favor one over the other?

• Speaker #1

  Yeah, a timeless question.

• Speaker #0

  You know, we've all heard about the Shiller-KB ratio, that Nobel Prize winning concept. using historical price-to-earnings to gauge market valuation.

• Speaker #1

  Yeah, the KP ratio, a classic.

• Speaker #0

  But Peterson argues it's been losing its predictive power lately, especially since the 1980s. Hmm,

• Speaker #1

  interesting.

• Speaker #0

  So instead of just ditching the KP ratio altogether, he tries to enhance it and get ready for this. He brings gold into the mix. Gold?

• Speaker #1

  How so?

• Speaker #0

  Well, it's fascinating how he uses gold not just as a safe haven asset, but as a dynamic counterbalance to stocks.

• Speaker #1

  Okay, I'm intrigued.

• Speaker #0

  Gold has this historical track record of performing well during periods of economic uncertainty, you know, when inflation is rising or geopolitical risks are on the horizon.

• Speaker #1

  Right. That classic safe haven appeal.

• Speaker #0

  OK, so instead of just fearing a market crash and hoarding gold, we're talking about strategically using it to navigate those long term market swings, those five to 25 year cycles that are bigger than any single boom or bust.

• Speaker #1

  Those secular cycles, right? The big picture stuff. Exactly. So how does he bring gold into the equation?

• Speaker #0

  Well, Peterson creates this new metric called the Secular Market Indicator, or SMI. It's essentially a ratio that compares the K-P ratio to the price of gold.

• Speaker #1

  So we're pitting stocks against gold to see which one's flashing a buy signal.

• Speaker #0

  It's more about gauging the relative attractiveness of stocks versus gold at a given point in time. Okay, got it. Think of it as a gauge on the economic climate. Is it favorable for risk on assets like stocks? Or is it signaling a need for the stability of gold?

• Speaker #1

  a sort of risk on risk off barometer using those two assets. Interesting.

• Speaker #0

  And this SMI actually spits out actionable trading signals.

• Speaker #1

  That's the really cool part. Peterson proposes a simple trading rule based on the SMI's movements. When the SMI crosses above plus one, it's a signal to overweight gold.

• Speaker #0

  So basically, when gold is shining brighter than stocks, according to this ratio, it's time to shift gears.

• Speaker #1

  Exactly.

• Speaker #0

  And conversely, when the SMI drops below negatrol, it's time to tilt towards equities.

• Speaker #1

  So work. We're constantly monitoring this SMI and making adjustments to our portfolio. Sounds like we'd be jumping in and out of positions pretty frequently.

• Speaker #0

  Not quite. Peterson actually suggests a yearly rebalancing period. So you calculate the SMI at the beginning of each year and adjust your portfolio accordingly. It's more about capturing those long-term secular trends than trying to time every short-term wiggle.

• Speaker #1

  Makes sense. Trying to chase every market blip can lead to a lot of unnecessary trading and costs.

• Speaker #0

  Precisely. This yearly rebalancing seems to strike a balance between capturing the signal and minimizing trading friction.

• Speaker #1

  Okay, but does this strategy actually work? Let's get to the heart of the matter. What did the backtests tell us?

• Speaker #0

  Well, according to Peterson's research, the backtests show that this approach outperforms both a pure stock portfolio and a pure gold portfolio about 70% of the time over a 10-year period.

• Speaker #1

  Wow, 70%. That's a pretty significant outperformance. It is. And what's even more interesting is that this outperformance holds true even during periods when the KPE ratio alone didn't accurately predict market movements.

• Speaker #0

  So gold adds a valuable layer of insight. It helps us navigate those periods where traditional valuation metrics might be misleading.

• Speaker #1

  Exactly. It's like having a secondary indicator to confirm or challenge the KPE ratio signals.

• Speaker #0

  Now, I'm curious about the specifics of these backtests. What time period did Peterson analyze?

• Speaker #1

  The research covers a very impressive timeframe. The backtests go all the way back to 1886.

• Speaker #0

  Wow, 1886. That's over a century of data. We're talking about periods of major wars, depressions, technological revolutions. It's a very robust dataset.

• Speaker #1

  It is. And the fact that this strategy has consistently outperformed over such a long period is quite remarkable.

• Speaker #0

  It speaks to its ability to adapt to different market environments.

• Speaker #1

  Exactly. It's not just a strategy that works in certain conditions. It seems to have a timeless quality to it.

• Speaker #0

  Now let's talk numbers. What kind of returns are we looking at with this secular-driven approach?

• Speaker #1

  The paper provides some really intriguing performance metrics. The average annual return of this strategy, after adjusting for inflation since 1886,

• Speaker #0

  is 8%. 8% after inflation. That's pretty solid, especially considering the long time frame.

• Speaker #1

  Yes, and it significantly outperforms both stocks and gold individually.

• Speaker #0

  What were the returns for those?

• Speaker #1

  Well, stocks averaged a 5% annual return over the same period, while gold lagged behind at 1%.

• Speaker #0

  Interesting. So by dynamically allocating between stocks and gold... Based on the SMI signals, we're essentially capturing the best of both worlds.

• Speaker #1

  That's the essence of the strategy. It's about riding the waves of the market, being in stocks when they're surging and switching to gold when storm clouds gather.

• Speaker #0

  Now, high returns are great, but risk is always a factor. What about the volatility and drawdowns of this strategy?

• Speaker #1

  Peterson's back tests show that the secular-driven portfolio had a standard deviation of 14% since 1886.

• Speaker #0

  Okay. And how does that compare to the volatility of stocks and gold?

• Speaker #1

  Well, the standard deviation of stocks was 19% over the same period, while gold was much lower at 7%.

• Speaker #0

  So the secular-driven portfolio falls somewhere in the middle. Not as volatile as a pure stock portfolio, but not as smooth as a pure gold portfolio.

• Speaker #1

  Precisely. It's a balance between capturing growth and managing risk.

• Speaker #0

  Now let's talk about the downside. How deep were the drawdowns with this strategy?

• Speaker #1

  The maximum drawdown of the secular-driven portfolio was netted at 28% since 1886.

• Speaker #0

  Netted at 28%. That's still a significant drop. But how does it compare to the maximum drawdowns of stocks and gold?

• Speaker #1

  Well, stocks experienced a much larger maximum drawdown of netted at 58% over the same period, while gold had a maximum drawdown of netted at 37%.

• Speaker #0

  So the secular-driven portfolio had the smallest maximum drawdown of the three. It seems to be doing a good job of mitigating losses during those turbulent periods.

• Speaker #1

  That's a key takeaway. By dynamically allocating between stocks and gold, we're essentially building a risk management mechanism into our portfolio.

• Speaker #0

  Instead of just riding the roller coaster of the stock market, we're switching to a smoother ride when things get rough.

• Speaker #1

  Exactly. It's about adapting to the market environment and positioning our portfolio accordingly.

• Speaker #0

  This is getting really interesting. We've got a simple yet powerful trading rule based on this new metric called the SMI. And the backtests show some very impressive results in terms of returns, risk, and drawdowns.

• Speaker #1

  It's a compelling case for incorporating gold into a quantitative trading strategy.

• Speaker #0

  All right. So we've got the what and the how, but I'm curious about the why. What's the underlying logic behind this strategy's success? Why does it seem to work so well over such a long period?

• Speaker #1

  Well, Peterson delves into the historical context to explain the rationale behind this approach. He argues that secular bull and bear markets are driven by fundamental economic forces. These forces play out over decades. shaping the investment landscape in profound ways.

• Speaker #0

  So it's not just about random market fluctuations. There's a deeper story behind these long-term cycles.

• Speaker #1

  Exactly. Peterson highlights several factors that contribute to these long-term cycles. Things like warfare and peace, severe financial crises, technological innovation, and demographic shifts.

• Speaker #0

  These are major events that have a ripple effect across the economy and the markets.

• Speaker #1

  Precisely. And each secular cycle leaves its mark on investor behavior and asset prices.

• Speaker #0

  So by understanding these historical patterns, we can gain insights into how markets might behave in the future.

• Speaker #1

  That's the idea. It's about recognizing that history doesn't repeat itself exactly, but it often rhymes.

• Speaker #0

  Okay, so let's unpack these secular cycles a bit further. How do they impact the performance of stocks and gold?

• Speaker #1

  Peterson's research suggests that during secular bull markets, when the economy is expanding, stocks tend to deliver strong and consistent returns.

• Speaker #0

  Makes sense. When businesses are thriving and profits are growing, stock prices tend to follow suit.

• Speaker #1

  On the other hand, during secular bear markets marked by economic contraction or stagnation, gold often shines.

• Speaker #0

  It becomes the safe haven, the store of value that investors flock to when they're seeking stability and protection.

• Speaker #1

  Exactly. And the SMI helps us identify which phase of the cycle we're in so we can position our portfolio accordingly.

• Speaker #0

  It's like having a compass that... that points us toward the asset class that's most likely to thrive in the prevailing economic environment.

• Speaker #1

  That's a great analogy. The SMI helps us navigate those long-term shifts and avoid getting caught on the wrong side of the market.

• Speaker #0

  All right, this is all very fascinating, but let's be realistic. What are some of the potential challenges or limitations of this strategy?

• Speaker #1

  Well, one potential challenge is the psychological aspect. This strategy requires a long-term mindset and the discipline to stick to the plan. even when markets get turbulent.

• Speaker #0

  It's easy to get swayed by short-term noise and emotions, especially when you see your portfolio swinging back and forth between stocks and gold.

• Speaker #1

  Exactly. It's about staying focused on the horizon, not the waves.

• Speaker #0

  And the SMI can actually help with this by providing a clear and objective rule. It takes the emotion out of the equation.

• Speaker #1

  Precisely. It's like having a predefined roadmap that guides our decisions.

• Speaker #0

  So instead of second-guessing ourselves or making impulsive moves, We can just follow the SMI's signals.

• Speaker #1

  And by sticking to this roadmap, we can avoid making emotional decisions that could derail our long-term goals.

• Speaker #0

  Now, let's talk about a specific fear that many investors have. What if I miss the exact turning points of the market? What if I switch to gold just before a stock market rally? or vice versa.

• Speaker #1

  Peterson acknowledges this concern in his research. He points out that the SMI isn't designed to pinpoint the precise peaks and valleys of the market.

• Speaker #0

  So it's not about timing the market perfectly.

• Speaker #1

  Exactly. It's about recognizing the broader trend and positioning our portfolio accordingly.

• Speaker #0

  And even if we miss the exact turning points, the strategy's long-term focus and risk management properties can still help us achieve our goals.

• Speaker #1

  That's right. The SMI's primary objective is to identify those secular cycles and position us on the right side of the market for the long haul.

• Speaker #0

  Okay, so it's more about playing the long game than trying to win every single trade.

• Speaker #1

  Precisely. And by adopting this patient and disciplined approach, we can potentially ride out those market fluctuations and emerge stronger on the other side.

• Speaker #0

  All right, so we've covered the basic mechanics of the SMI, the trading rule, and the impressive backtest results. But now I want to delve a little deeper into the practical aspects of this strategy. How can we actually implement this approach in the real world?

• Speaker #1

  Well, the first step is to understand the concept of secular markets and how they influence asset prices.

• Speaker #0

  It's about recognizing that markets don't move in a straight line. There are periods of expansion and contraction that shape the investment landscape.

• Speaker #1

  Exactly. And once we grasp this concept, we can start to incorporate the SMI into our decision-making process.

• Speaker #0

  So we can monitor the SMI's movements and use its signals as a guide for adjusting our asset allocation.

• Speaker #1

  Right. And remember, the SMI is... based on publicly available data, the Shiller-Capey ratio and the price of gold.

• Speaker #0

  So it's not some secret formula. Any investor can access this information.

• Speaker #1

  Absolutely. Now, the specific implementation will vary depending on individual circumstances. Factors like risk tolerance, time horizon, and investment goals will influence how we applied SMI signals.

• Speaker #0

  So it's not a one-size-fits-all approach. We need to tailor it to our own needs and preferences.

• Speaker #1

  Exactly. It's about finding the right balance between following the signal And managing risk.

• Speaker #0

  For example, a more conservative investor might choose to allocate a smaller portion of their portfolio to the favored asset class when the SMI triggers a signal.

• Speaker #1

  While a more aggressive investor might make a more substantial shift.

• Speaker #0

  It's about finding the level of risk that we're comfortable with.

• Speaker #1

  Precisely. And it's important to note that Peterson's research is just a starting point. It's an intriguing framework that can be further explored and adapted.

• Speaker #0

  So we can use it as a foundation and build upon it.

• Speaker #1

  Exactly. For example, we could investigate the SMI's performance across different time periods or asset classes.

• Speaker #0

  Or we could explore different weighting schemes or rebalancing frequencies.

• Speaker #1

  The key is to approach this research with a curious and critical mindset.

• Speaker #0

  To test its assumptions and adapt its principles to our own unique investment objectives.

• Speaker #1

  Now, beyond the specific trading rule, Peterson's work offers broader lessons about investing.

• Speaker #0

  It reminds us that markets are cyclical and that understanding these cycles can give us an edge.

• Speaker #1

  Exactly. It also highlights the importance of diversification and strategic asset allocation.

• Speaker #0

  By spreading our investments across different asset classes and adjusting our exposure based on market conditions, we can potentially enhance returns and reduce risk.

• Speaker #1

  This research also emphasizes the value of patience and discipline.

• Speaker #0

  It encourages us to resist the urge to chase short-term gains and focus on building wealth over the long run.

• Speaker #1

  These are timeless. principles that can guide us towards success in the ever-changing world of investing.

• Speaker #0

  And they're particularly relevant in today's market environment, where volatility and uncertainty are the norm.

• Speaker #1

  Oh, much uncertainty these days.

• Speaker #0

  All right. So we've covered a lot of ground in this first part of our deep dive. We've explored the mechanics of the SMI, the trading rule, the impressive backtest results, and some of the practical considerations for implementing this strategy.

• Speaker #1

  It's been a fascinating discussion so far.

• Speaker #0

  It has. And in the next part of our deep dive, we'll delve even deeper into the nuances of Peterson's research. We'll examine the historical context in more detail, explore some of the potential challenges and limitations of this approach, and discuss its broader implications for investors.

• Speaker #1

  I'm looking forward to it.

• Speaker #0

  Me too. Stay tuned.

• Speaker #1

  Picking up where we left off, let's address some common concerns investors might have when considering this strategy.

• Speaker #0

  Okay. So we've established the SMI is intriguing on paper, the backtests look promising, but... But where might it stumble in real world trading?

• Speaker #1

  Well, data availability is a valid concern. The Scheller KP ratio relies on historical earnings data. While readily available for major markets like the US, it might be less robust for international or emerging markets.

• Speaker #0

  That makes sense. Solid data is the foundation of any quantitative approach. Right. What about the model itself? Any risks there?

• Speaker #1

  Um, model risk is inherent to any simplification of complex reality. SMI with its two variables, the KP ratio and gold price, might miss crucial nuances.

• Speaker #0

  So we need to remember it's a tool, not a crystal ball.

• Speaker #1

  Exactly. It requires critical thinking, not blind faith. And then there's the practical matter of transaction costs when switching between stocks and gold.

• Speaker #0

  Right. Those fees add up. Didn't Peterson suggest yearly rebalancing to mitigate this?

• Speaker #1

  He did, but it's still important to be mindful of trading expenses, especially if your portfolio isn't substantial.

• Speaker #0

  Okay. Data, model limitations, trading costs. What other potential pitfalls should we consider?

• Speaker #1

  Behavioral biases. Even with a clear rule like the SMI, we might hesitate to sell winners, hold onto losers too long, or simply doubt the model during volatile periods.

• Speaker #0

  Classic human investor behavior. It's tough to stay rational when your portfolio is bouncing around.

• Speaker #1

  Absolutely. Discipline and a predefined plan are key. And that's where the SMI's simplicity becomes an advantage. It can act as an emotional anchor.

• Speaker #0

  Interesting. So instead of reacting to each market twist, the SMI encourages a more zoomed out perspective.

• Speaker #1

  Exactly. Now let's explore some specific advantages of this approach beyond its simplicity. The historical robustness of the strategy is a major plus.

• Speaker #0

  All right. We talked about those bag tests spanning over a century. But past performance isn't a guarantee of the future, right?

• Speaker #1

  True, but such a consistent outperformance over a variety of market conditions, wars, recessions, technological booms, does lend credence to the approach.

• Speaker #0

  It suggests there's something fundamentally sound about leveraging gold to counterbalance stocks, especially over these longer cycles.

• Speaker #1

  Precisely. Another advantage is the psychological comfort that comes with having a predefined plan.

• Speaker #0

  It removes that constant anxiety of Should I be doing something different with my portfolio?

• Speaker #1

  And it can help avoid impulsive decisions driven by fear or greed.

• Speaker #0

  Now, some listeners might be wondering, why not just stick with a balanced portfolio of stocks and gold? Hold for the long term and call it a day.

• Speaker #1

  A balanced portfolio is certainly a valid approach, but Peterson argues this dynamic approach, adjusting to secular trends, can potentially do better.

• Speaker #0

  So it's about opportunistically tilting towards the asset class the SMI favors. Capitalizing on those long ways we talked about.

• Speaker #1

  Exactly. Now, to be fair, let's address some criticisms. Some might argue the SMI, with its two variables, is too simplistic.

• Speaker #0

  Fair enough. Real-world markets are influenced by a multitude of factors.

• Speaker #1

  Right. And, like any model, the SMI can't capture every nuance. There's always the risk of unforeseen events that fall outside its scope.

• Speaker #0

  That's where human judgment and staying informed about the broader economic landscape come in.

• Speaker #1

  Absolutely. Another potential criticism is that the strategy's long-term focus might not be suitable for everyone.

• Speaker #0

  Investors with shorter time horizons or specific liquidity needs might find yearly rebalancing too rigid.

• Speaker #1

  Precisely. This strategy is best suited for patient investors seeking to grow wealth steadily over decades.

• Speaker #0

  Okay, so we've explored potential advantages, acknowledged some valid criticisms. Now, let's get specific. How does Peterson propose investors actually put this into practice?

• Speaker #1

  He emphasizes understanding the concept of secular markets as the first step, recognizing that markets don't move in straight lines, but in these long waves of expansion and contraction.

• Speaker #0

  It's about having that zoomed out perspective, right? Seeing the bigger picture beyond the daily market noise.

• Speaker #1

  Exactly. Once that's grasped, incorporating the SMI into the decision making process is fairly straightforward. Monitor its movements, use its signals as a guide to adjust your asset allocation.

• Speaker #0

  And we know the data for this is publicly available, so it's not about having some insider knowledge or expensive tools.

• Speaker #1

  Right. Now, the specific implementation, the exact weighting between stocks and gold, will vary based on individual factors. Risk tolerance, time horizon, investment goals.

• Speaker #0

  So it's not a rigid do this, then this prescription, but a framework adaptable to each investor's circumstances.

• Speaker #1

  Exactly. It's about finding that sweet spot between the signal and your personal comfort level with risk.

• Speaker #0

  And Peterson encourages further exploration and adaptation of his research. So there's room to build on this, not just blindly follow it.

• Speaker #1

  Absolutely. One could investigate how the SMI performs across different asset classes, explore alternative weighting schemes, or even tweak the rebalancing frequency.

• Speaker #0

  It's a springboard for further investigation, not a finished product.

• Speaker #1

  That's great. Now, you mentioned earlier that Peterson digs deeper into the historical context behind these secular cycles. Let's unpack that a bit.

• Speaker #0

  He argues these cycles aren't random, but driven by fundamental forces that play out over decades. Things like major wars, peace treaties, financial crises, technological breakthroughs, demographic shifts.

• Speaker #1

  These are epic defining events that reshape the economic landscape, and naturally markets react to that.

• Speaker #0

  Exactly. Each cycle leaves its imprint on investor psychology and asset prices. And by studying these patterns, we gain insights into potential future market behavior.

• Speaker #1

  It's about spotting the rhyme scheme of history, so to speak, not expecting a perfect repetition, but understanding the recurring themes.

• Speaker #0

  Precisely. Now, how did the secular cycle specifically impact stocks and gold?

• Speaker #1

  Well, we all know intuitively that stocks tend to do well during economic booms. Is that what Peterson's research confirms? Yes.

• Speaker #0

  His findings suggest that during secular bull markets, when the economy is humming along, stocks are the place to be. Strong and consistent returns are the norm. Makes sense. Businesses are thriving, profits are rising, so stock prices follow suit.

• Speaker #1

  Now flip the script to a secular bear market. Economies contracting, things are uncertain. What happens to gold?

• Speaker #0

  It becomes the go-to asset, right? a safe haven, the store of value that people seek when fearing a loss of purchasing power or systemic risk.

• Speaker #1

  Exactly. And that's where the brilliance of the SMI lies. It helps us discern which phase of the cycle we're in, allowing us to position our portfolio accordingly.

• Speaker #0

  So it acts as a guide to favor either the growth potential of stocks during good times or the stability of gold when storm clouds gather.

• Speaker #1

  That's a great way to put it. about aligning our investments with the prevailing economic winds instead of fighting against them.

• Speaker #0

  And that alignment over the long term is what potentially leads to the outperformance we saw in the back tests.

• Speaker #1

  Precisely. Now let's delve into a topic that's always top of mind for investors. Risk. We know high returns are appealing, but they often come with volatility. How does this strategy handle that?

• Speaker #0

  Yeah, big swings can be exciting on the way up, but terrifying on the way down. What do Peterson's back tests tell us about the volatility of this approach?

• Speaker #1

  His research shows the secular driven portfolio since 1886 had a standard deviation of 14%.

• Speaker #0

  OK, 14%. Put that in context for us. How does that compare to pure stocks or pure gold?

• Speaker #1

  Well, stocks over the same period had a standard deviation of 19%, while gold was significantly smoother at 7%.

• Speaker #0

  So this strategy falls somewhere in between. Not the wildest ride, but not a snooze fest either.

• Speaker #1

  Exactly. It seeks to capture a a good chunk of the stock market's upside while smoothing out the bumps by periodically shifting to gold.

• Speaker #0

  Now let's talk about the downside. Drawdowns those periods when your portfolio value drops from its peak. How did the strategy handle those?

• Speaker #1

  Since 1886, the maximum drawdown for this portfolio was negative 28 percent.

• Speaker #0

  Ouch. Negative 28 percent. That's still a significant hit. But again, context is key. How does that compare to the drawdowns of pure stocks or pure gold?

• Speaker #1

  Over the same period, stocks experienced a gut-wrenching maximum drawdown of negative 58%. Gold, while smoother overall, still had a negative 37% drawdown.

• Speaker #0

  So the secular-driven portfolio, while not immune to drawdowns, seems to have handled those historical gut punches better than either stocks or gold alone.

• Speaker #1

  That's right. And that's a key takeaway here. By dynamically allocating between these two asset classes, we're essentially embedding a risk management mechanism into the portfolio.

• Speaker #0

  Instead of being fully exposed. to the stock market's wild swings, we're strategically shifting some of that exposure to gold when things get dicey.

• Speaker #1

  Exactly. It's about adapting to the prevailing market environment rather than stubbornly sticking to one approach no matter what.

• Speaker #0

  So we've laid out the mechanics of the SMI, the simplicity of the trading rule, the impressive back tests, and even delved into historical context. What else should our listeners know about Peterson's research?

• Speaker #1

  He emphasizes that blindly following any model even one as seemingly effective as the SMI isn't enough.

• Speaker #0

  OK, so it's not just about plugging numbers and letting the computer make all the decisions.

• Speaker #1

  Not at all. Peterson stresses the importance of understanding the underlying economic forces that drive those secular cycles we've been discussing.

• Speaker #0

  So it's about being an informed investor, not just a rule follower. We need to stay up to date on economic trends, geopolitical events, technological disruptions, those sorts of things.

• Speaker #1

  Exactly. Those are the very factors that shape the long term investment landscape. By combining the insights from the SMI with our own knowledge and judgment, we can make more nuanced and potentially better decisions.

• Speaker #0

  It's about blending the quantitative and the qualitative, the objective signals with human understanding. Makes sense. Now, for listeners eager to explore this further, where can they find the raw materials for calculating the SMI themselves?

• Speaker #1

  It's all publicly available data. The Shiller-Keepe E-ratio can be found on various financial websites. And real-time gold prices are readily accessible.

• Speaker #0

  So no need for expensive subscriptions or specialized data feeds. Anyone can roll up their sleeves and start crunching these numbers.

• Speaker #1

  Absolutely. Now, the specific investment vehicles you use will depend on your preferences. For stocks, broad market index funds or ETFs are the simplest options.

• Speaker #0

  And for gold, you've got a few choices. Physical gold, gold ETFs, gold mining stocks.

• Speaker #1

  Each has its own pros and cons in terms of cost, liquidity, and risk. Do your research and pick what suits your needs.

• Speaker #0

  One crucial aspect of any portfolio strategy is rebalancing. How often does Peterson recommend we check in and adjust things based on the SMI?

• Speaker #1

  He suggests a yearly rebalancing frequency.

• Speaker #0

  Okay, so once a year, we review our portfolio's allocation and make adjustments to stay aligned with the SMI's current signal. Makes sense. But beyond the mechanics, isn't there a psychological element to rebalancing that we should discuss?

• Speaker #1

  Absolutely. Rebalancing can be emotionally challenging, especially when markets are volatile.

• Speaker #0

  It's easy to second guess yourself. You might see your gold holdings lagging and be tempted to chase recent stock market winners or panic and sell everything when your portfolio dips.

• Speaker #1

  Exactly. That's why a predefined plan is crucial. It acts as your anchor, preventing you from making rash decisions based on emotion.

• Speaker #0

  So rebalancing isn't just a numbers game. It's a test of discipline and sticking to the long-term plan.

• Speaker #1

  Precisely. It's about trusting the process, even when your instincts scream otherwise.

• Speaker #0

  Now, for those intrigued by Peterson's findings but also wanting to be cautious, what are some risks or limitations to consider?

• Speaker #1

  Model risk is inherent. As we discussed, the SMI, with its two variables, is a simplification of reality. There's always the possibility it misses crucial factors or generates misleading signals.

• Speaker #0

  Right. It's a tool to guide us, not a perfect oracle. What other risks should be on our radar?

• Speaker #1

  Implementation risk. Even with a clear rule like the SMI, human error can creep in. Misinterpreting signals, creating at inopportune moments, racking up excessive fees. These can all sabotage the strategy.

• Speaker #0

  So diligence and a solid understanding of the approach are key, not just diving in headfirst.

• Speaker #1

  Exactly. And then there's a risk specific to this type of strategy, concentration risk.

• Speaker #0

  Okay. Unpack that for us. What's concentration risk and how does it apply here?

• Speaker #1

  By switching between only two asset classes, stocks and gold, we're inherently more concentrated than a broadly diversified portfolio.

• Speaker #0

  So our eggs are essentially in two baskets instead of spread across many. What's the potential downside of that?

• Speaker #1

  If both stocks and gold experience a simultaneous decline, our portfolio could suffer significant losses. It's a risk to consider carefully.

• Speaker #0

  So while the SMI helps navigate between those two assets, it doesn't protect us from a scenario where both asset classes struggle.

• Speaker #1

  Right. Additional diversification beyond just stocks and gold might be worth considering for some investors, especially those with lower risk tolerance.

• Speaker #0

  Excellent point. So to summarize, Peterson's research offers a compelling framework for understanding these long-term market cycles and using gold as a strategic counterbalance to stocks. The SMI provides a simple, objective signal to guide that process. The backtests are impressive. But it's not a guaranteed path to riches.

• Speaker #1

  Precisely. It's crucial to be aware of potential risks and limitations, to tailor the approach into your own circumstances, and most importantly, to understand the broader economic context driving these cycles.

• Speaker #0

  Investing with awareness, not just on autopilot, sounds like a good principle for any strategy, really.

• Speaker #1

  Absolutely. Now, shifting gears a bit, Peterson also delves into the SMI's historical track record of identifying major market turning points. It's quite fascinating.

• Speaker #0

  Okay, let's time travel a bit. Backtesting over a century provides a lot of data to analyze. What are some specific instances where the SMI proved its worth?

• Speaker #1

  One striking example is the 1920s, the roaring 20s. The SMI consistently signaled a bull market, with stocks soaring and the economy booming. Its reading remained below the negative threshold, suggesting equities were the place to be.

• Speaker #0

  And then came the 1930s, the Great Depression. How did the SMI handle that? drastic shift.

• Speaker #1

  It crossed above its positive threshold, signaling a move to gold. As stocks crashed and the economy contracted, gold held its value, demonstrating its classic safe haven role.

• Speaker #0

  So even during such a dramatic market upheaval, the SMI adapted, providing a signal that could have potentially saved investors from devastating losses.

• Speaker #1

  Exactly. It showcases the SMI's potential to identify those major turning points, those inflection points where the economic winds shift direction.

• Speaker #0

  What about the post-war boom years, the 1950s and 1960s? How did the SMI fare during that period of economic expansion?

• Speaker #1

  Once again, it signaled a bull market. As the economy grew and stock prices rose, the SMI remained below its negative threshold, encouraging investors to ride that wave of growth.

• Speaker #0

  And then the 1970s hit. Inflation, oil shocks, economic stagnation. A very different environment.

• Speaker #1

  Right. And the SMI adapted, crossing above its positive threshold, signaling a shift towards gold. Once again, gold demonstrated its value as a hedge against inflation and economic turmoil.

• Speaker #0

  So the SMI wasn't just good at spotting bull markets. It correctly identified those periods where the economic climate favored gold stability over stocks potential.

• Speaker #1

  Exactly. Now let's jump to a more recent example. The dotcom bubble of the late 1990s. How did the SMI handle that period of speculative frenzy?

• Speaker #0

  That's interesting. Given the tech stock mania, you'd expect the SMI to be flashing buy stocks like crazy.

• Speaker #1

  Surprisingly, it remained relatively low even as tech valuations soared.

• Speaker #0

  So despite the euphoria, the SMI was picking up on some underlying warning signs.

• Speaker #1

  Peterson points out that the SMI's focus on long-term valuation metrics, like the TP ratio, helped it see past the short-term hype. It recognized that despite the rapid price rises, valuations were becoming stretched.

• Speaker #0

  It's like the SMI was saying, hold on, this party's getting a bit too wild.

• Speaker #1

  And when the bubble inevitably burst in the early 2000s, the SMI, right on cue, crossed above its positive threshold, signaling a move to gold.

• Speaker #0

  Once again, gold provided a cushion during the market turmoil, as the SMI suggested it might. These historical examples are fascinating. They really showcase the SMI's potential to adapt and identify those key market turning points.

• Speaker #1

  They do. But it's crucial to remember. these historical successes don't guarantee future performance.

• Speaker #0

  Right. The disclaimer we always have to keep in mind, past performance is not a crystal ball.

• Speaker #1

  Exactly. However, these examples provide valuable insight into how the SMI has behaved in a variety of market environments.

• Speaker #0

  And they can give us some confidence that the approach has the potential to continue being effective in the future, even if the exact circumstances are different.

• Speaker #1

  Now let's address some criticisms often leveled at strategies that rely heavily on backtesting. One is that past market conditions might not always be representative of the future.

• Speaker #0

  Yeah, that makes sense. The world keeps changing. What worked in the 19th century might not be as reliable today.

• Speaker #1

  Right. The economic, political, and technological landscape is constantly evolving. So applying lessons from the past requires careful consideration.

• Speaker #0

  What other limitations of backtesting should we be aware of?

• Speaker #1

  Historical data itself can be problematic. Data collection methods might have changed over time. Or certain events might not be fully captured in the available records.

• Speaker #0

  Garbage in, garbage out, as they say. Bad data can lead to misleading conclusions. Any other biases we need to watch out for when analyzing historical performance?

• Speaker #1

  Survivorship bias is a major one. It occurs when we only analyze the performance of investments that have survived over time, those that haven't gone bust or disappeared.

• Speaker #0

  So we end up with a potentially overly optimistic view of historical returns because All the failures are excluded from the data. How do we account for that when looking at backtests?

• Speaker #1

  It's tricky. Sometimes it's impossible to know which investments have disappeared. But being aware of this bias is important. It reminds us that historical performance can be misleadingly rosy.

• Speaker #0

  So to summarize, while backtests are a valuable tool, they're not a magic formula for predicting the future. Past performance is a guide, not a guarantee.

• Speaker #1

  Exactly. And being aware of potential biases in historical data helps us avoid drawing overly optimistic or simplistic conclusions.

• Speaker #0

  Now let's shift our focus to a specific type of market environment that often throws investors for a loop. Periods of heightened uncertainty.

• Speaker #1

  Times when fear and anxiety are high and traditional forecasts seem unreliable.

• Speaker #0

  Right, like during a global pandemic, a major war, a financial crisis, those sort of events. How does Peterson's research suggest the SMI handles those situations?

• Speaker #1

  He found the SMI tends to perform particularly well during these uncertain periods. Its ability to identify a shift towards gold as a safe haven helps mitigate losses and preserve capital.

• Speaker #0

  So when the world feels like it's falling apart, the SMI isn't just sitting there frozen. It adapts.

• Speaker #1

  Exactly. It's designed to react to those shifts in investor sentiment and economic conditions.

• Speaker #0

  Let's ground this with some real-world examples. How did the SMI fare during the 2008 financial crisis?

• Speaker #1

  As stock markets were plummeting and the global economy teetered on the brink, the SMI crossed above its positive threshold, signaling a shift to gold.

• Speaker #0

  And did gold live up to its safe haven reputation during that crisis?

• Speaker #1

  It did. While stock markets crashed, gold held its value, providing a cushion for investors who followed the SMI's signal.

• Speaker #0

  It's those moments that really test a strategy's mettle. Not just how it performs during the good times, but how it protects you when things get ugly.

• Speaker #1

  Absolutely. Another example is the European sovereign debt crisis of the early 2010s. Fears of a eurozone collapse were high. Markets were tumbling.

• Speaker #0

  Another nail biting time for investors. How did the SMI react?

• Speaker #1

  Once again, it signaled a shift towards gold. As investors globally sought safety and stability, gold rallied. The SMI helped investors navigate that uncertainty and potentially avoid significant losses in stocks.

• Speaker #0

  So two for two on handling crises effectively. What about a more recent example, the COVID-19 pandemic of 2020?

• Speaker #1

  As the virus spread, governments imposed lockdowns and economies shuttered to a halt. Global stock markets went into freefall. The SMI responded quickly, crossing above its positive threshold, signaling a move to gold.

• Speaker #0

  And how did gold perform during that unprecedented time?

• Speaker #1

  It initially dipped alongside other assets as investors rushed to liquidity, but it quickly recovered and rallied as its safe haven status was reaffirmed.

• Speaker #0

  So the SMI, even amidst a global pandemic, identified that shift in sentiment. potentially guiding investors towards a haven amidst the storm. These are compelling examples. They really highlight the SMI's adaptability and its potential to protect capital during those white-knuckle periods.

• Speaker #1

  They do. But it's important to acknowledge that even gold's performance as a safe haven can vary. It's not a foolproof guarantee. Right.

• Speaker #0

  No investment is completely risk-free. But Peterson's research does suggest that historically, gold has tended to outperform stocks during those broader secular bear markets and these periods of heightened uncertainty.

• Speaker #1

  And even if gold doesn't produce spectacular returns during such times, it can still act as a portfolio diversifier, helping to reduce overall volatility.

• Speaker #0

  So it's not always about making a killing with gold, but about providing that ballast to prevent the whole ship from capsizing.

• Speaker #1

  Precisely. It's about managing risk, preserving capital, and giving yourself a more stable foundation to weather those storms.

• Speaker #0

  Now let's shift our focus to those who might benefit most from this research, long-term investors. People saving for retirement or perhaps building wealth for a future goal decades away. What specific advantages does this approach offer them?

• Speaker #1

  Peterson argues that his secular driven approach, with its emphasis on long term trends and risk management, is particularly well suited for those investors.

• Speaker #0

  Makes sense. If you're in it for the long haul, writing out those short term ups and downs becomes easier when you have a strategy designed for those longer cycles.

• Speaker #1

  Exactly. One of the biggest advantages is its potential to mitigate the damage from market drawdown.

• Speaker #0

  Those periods when your portfolio value drops significantly from its peak. Drawdowns can be emotionally devastating, especially if they occur close to retirement.

• Speaker #1

  Right. Having a chunk of your portfolio suddenly worth much less can derail your plans. Peterson's strategy aims to soften those blows by shifting to gold when the SMI signals a bear market.

• Speaker #0

  So instead of riding the stock market roller coaster all the way down, you're hopping off and getting on a calmer ride for a while.

• Speaker #1

  a while. Precisely. It can help preserve capital. preventing the need to sell assets at fire sale prices just when you need the money the most.

• Speaker #0

  That peace of mind is probably worth a lot for those approaching retirement. Now, beyond mitigating losses, does this strategy also offer the potential for enhanced returns over the long run?

• Speaker #1

  It does. By capturing the upside of both stocks and gold during their respective favorable periods, the strategy aims to generate consistent long-term growth.

• Speaker #0

  So it's not just about playing defense. It's about strategically switching between offense and defense to optimize your overall return.

• Speaker #1

  Exactly. Now, of course, long-term investors have their own unique considerations when implementing this strategy.

• Speaker #0

  What are some of the key factors they need to keep in mind?

• Speaker #1

  Time horizon is crucial. Someone with a 30-year horizon has much more flexibility than someone with a five-year horizon.

• Speaker #0

  Right. The longer your runway, the more patient you can be and the more you can lean into those secular trends.

• Speaker #1

  Exactly. Investors with a longer time horizon can afford to allocate a larger portion of their portfolio portfolio to the favored asset class when the SMI triggers a signal.

• Speaker #0

  While those with a shorter horizon might need to adopt a more balanced approach to avoid being caught off guard by an unexpected shift in the market.

• Speaker #1

  Right. Another crucial factor is risk tolerance. How comfortable are you with seeing your portfolio value fluctuate?

• Speaker #0

  That's a personal question with no right or wrong answer.

• Speaker #1

  Exactly. Those with a higher risk tolerance can stomach larger swings. perhaps allocating a larger chunk to the favorite asset class. They might even consider using leverage to potentially magnify returns.

• Speaker #0

  While those with a lower risk tolerance would probably opt for a more conservative approach, prioritizing stability and capital preservation over potential high growth.

• Speaker #1

  Precisely. And for all long-term investors, regular rebalancing is key. It helps maintain their desired asset allocation and ensures they stay on track to reach their goals.

• Speaker #0

  So it's about being proactive, not just setting it and forgetting it. You need to check in with your portfolio, make adjustments as needed based on the SMI signals, and maintain that discipline.

• Speaker #1

  Exactly. Now let's address a common worry long-term investors might have. What if I miss the exact turning point at the market?

• Speaker #0

  It's that fear of switching to gold just as the stock market takes off, or vice versa. Nobody wants to feel like they're always a step behind.

• Speaker #1

  Peterson acknowledges this concern. He emphasizes that the SMI isn't about pinpointing. pointing the precise peaks and valleys of the market.

• Speaker #0

  It's not a crystal ball for market timing.

• Speaker #1

  Right. It's about recognizing the broader trend. the shift from a bull to a bear market or vice versa, and positioning your portfolio accordingly.

• Speaker #0

  And even if you miss the exact ideal entry or exit point, the strategy's long-term focus and risk management properties can still help you reach your goals.

• Speaker #1

  Exactly. It's about capturing the majority of the move, not obsessing over timing things perfectly.

• Speaker #0

  Because in the grand scheme of a 30-year investment horizon, missing a few percentage points here or there probably won't make or break you.

• Speaker #1

  Precisely. Long-term investing is a marathon, not a sprint. It's about patience, discipline, and trusting the process.

• Speaker #0

  Wise words for any investor, regardless of their strategy. Now, you mentioned earlier that Peterson acknowledges the limitations of his model. What's his advice to investors who find his research compelling, but also want to be cautious?

• Speaker #1

  He encourages using the SMI as a guide, not a gospel, to understand that it's a simplification of reality, and no model can perfectly predict the future.

• Speaker #0

  So healthy skepticism is encouraged. Don't just hand over your brain to the algorithm.

• Speaker #1

  Exactly. Peterson stresses combining the SMI's insights with your own knowledge and judgment to make those investment decisions.

• Speaker #0

  It's about being an active participant in the process, not a passive bystander.

• Speaker #1

  Right. He also encourages considering other factors that could influence market performance, things the SMI doesn't explicitly capture.

• Speaker #0

  Give us some examples. What other variables should be on our radar?

• Speaker #1

  Things like interest rates, inflation. Economic growth forecasts, geopolitical events, those can all have a significant impact on markets.

• Speaker #0

  So it's about having that broader perspective, staying informed about the economic and political landscape, and not just focusing narrowly on the SMI signals.

• Speaker #1

  Precisely. By adopting a holistic approach, incorporating a variety of perspectives, we make more robust, well-informed decisions.

• Speaker #0

  It's about becoming a well-rounded investor, not just a specialist in one particular indicator or model.

• Speaker #1

  Now, before we wrap up this deep dive into Peterson's research, I want to highlight one more fascinating aspect he explored, the psychological implications of understanding secular cycles.

• Speaker #0

  OK, so it's not just about the numbers. It's about how this knowledge can impact our behavior as investors.

• Speaker #1

  Exactly. Peterson argues that recognizing the existence of these long-term cycles can help us overcome common emotional biases that often lead to poor decisions.

• Speaker #0

  Let's unpack that. What specific biases can this knowledge help us mitigate?

• Speaker #1

  Recency bias is a big one. It's the tendency to overweight recent events or experiences when making decisions.

• Speaker #0

  So if we've just experienced a booming bull market, we assume that's the new normal and keep piling into stocks. Or conversely, after a nasty bear market, we become overly pessimistic and miss opportunities.

• Speaker #1

  Precisely. Understanding that markets move in cycles, that bull markets inevitably give way to bear markets and vice versa, can help us avoid extrapolating recent trends indefinitely into the future.

• Speaker #0

  It provides that longer-term perspective, preventing us from being overly influenced by the latest headlines or market swings.

• Speaker #1

  Another bias that secular cycle awareness can help with is herd mentality.

• Speaker #0

  That's the everybody's doing it, so it must be right mentality. We follow the crowd even when it leads us astray.

• Speaker #1

  Exactly. During a bull market, investors pile into stocks fueled by FOMO, the fear of missing out, and during a bear market they panic and sell. even if the underlying fundamentals haven't changed drastically.

• Speaker #0

  So understanding these cycles helps us resist that urge to blindly follow the crowd.

• Speaker #1

  Precisely. It allows us to make independent judgments based on our own research and analysis, rather than being swayed by the emotional tide.

• Speaker #0

  Now let's talk about a bias that's particularly painful. Loss aversion.

• Speaker #1

  That's the tendency to feel the pain of a loss more strongly than the pleasure of an equivalent gain. It's wired into our brains.

• Speaker #0

  And it can lead to some really bad decisions in the markets, like holding on to losing investments for far too long, hoping they'll come back, or selling winners prematurely for fear of losing those games.

• Speaker #1

  Exactly. Understanding that markets experience both upswings and downswings, that losses are an inevitable part of the game, can help us detach ourselves from the emotional impact of those short-term fluctuations.

• Speaker #0

  So instead of being ruled by fear and greed. We can focus on the long-term potential of our investments and make more rational decisions.

• Speaker #1

  Precisely. Now, how can understanding these secular cycles specifically translate into better investment decisions? Well,

• Speaker #0

  for one, it can prevent us from chasing after-reason performance. We can stop trying to time the market perfectly and instead focus on identifying investment opportunities that align with the current phase of the cycle.

• Speaker #1

  Exactly. Instead of trying to buy whatever's hot at the moment, we can be more strategic.

• Speaker #0

  So during a secular bull market, When growth is the dominant theme, we might favor growth stocks or perhaps emerging markets.

• Speaker #1

  While during a secular bear market when capital preservation is key, we might shift our focus to value stocks or defensive sectors.

• Speaker #0

  It's about adapting to the prevailing economic winds, not fighting against them.

• Speaker #1

  Another benefit of understanding these cycles is that it promotes patience. Knowing that markets inevitably experience both good times and bad times can help prevent impulsive decisions driven by fear. or greed

• Speaker #0

  So instead of constantly tinkering with our portfolio, reacting to every market blip, we can stick to our long-term plan and ride out those inevitable fluctuations.

• Speaker #1

  Exactly. It's about having the confidence to stay the course, even when the market throws a tantrum.

• Speaker #0

  Now, I imagine some listeners are thinking, okay, this all sounds great, but how do I actually identify the current phase of the secular cycle?

• Speaker #1

  Peterson offers a tool for that, the secular market indicator. or SMI, which we discussed earlier.

• Speaker #0

  Right. The ratio comparing the CAPE ratio to the price of gold. Its movements can signal whether we're in a secular bull or bear market.

• Speaker #1

  Exactly. However, it's crucial to remember that the SMI is just one tool, not a foolproof predictor.

• Speaker #0

  So don't blindly follow its signals. Use your own judgment and consider other factors when making investment decisions.

• Speaker #1

  Absolutely. The SMI is a guide, not a dictator.

• Speaker #0

  So to sum up this part of our discussion. Understanding these long-term market cycles isn't just an academic exercise. You can have a profound impact on our behavior and decision-making as investors.

• Speaker #1

  It can help us overcome those emotional biases that often lead to costly mistakes.

• Speaker #0

  It can encourage us to make more rational decisions, based on logic and a long-term perspective, rather than being swayed by fear and greed.

• Speaker #1

  And ultimately, it can help us achieve our investment goals more effectively.

• Speaker #0

  Now, let's shift gears and explore how Peterson's research applies to the crucial task of portfolio construction.

• Speaker #1

  He argues that traditional portfolio construction methods, those that rely primarily on historical data and a static market view, often fail to account for the impact of these secular trends we've been discussing.

• Speaker #0

  So they're essentially assuming that the past is a perfect predictor of the future and that markets behave consistently over time.

• Speaker #1

  Exactly. They also often neglect the role of gold as a counter.

• Speaker #0

  So they're essentially assuming that the past is a perfect predictor of the future. And that markets behave consistently over time.

• Speaker #1

  Exactly. They also often neglect the role of gold as a counterbalance to stocks.

• Speaker #0

  Right. The classic 60-40 portfolio stocks and bonds. Yeah. Rarely even considers gold.

• Speaker #1

  Peterson proposes a new approach to portfolio construction that explicitly incorporates secular cycles and the role of gold. He calls it secular-driven portfolio construction.

• Speaker #0

  Okay. I like where this is going. Let's dive into the principles of this approach.

• Speaker #1

  The first principle is to recognize that markets move in long-term cycles.

• Speaker #0

  We've been talking about those secular cycles quite a bit already, those long waves of expansion and contraction.

• Speaker #1

  Exactly. These cycles are driven by fundamental economic forces, and they have a profound impact on asset prices and investor behavior.

• Speaker #0

  So it's not just about short-term noise or random fluctuations. There's a deeper underlying rhythm to the market.

• Speaker #1

  The second principle is to identify the current phase of the secular cycle.

• Speaker #0

  We've discussed Peterson's SMI as a potential tool for that.

• Speaker #1

  Right. The SMI can be a valuable guide, but investors should also consider other factors such as economic growth, interest rates, and inflation.

• Speaker #0

  So it's about using the SMI as a starting point, but also incorporating our own judgment and analysis.

• Speaker #1

  The third principle is to align our portfolio's asset allocation with the current phase of the cycle.

• Speaker #0

  Okay, so if the SMI is signaling a secular bull market, we might tilt our portfolio more towards stocks.

• Speaker #1

  Exactly. And during a secular bear market, we might increase our allocation to gold.

• Speaker #0

  It's about being opportunistic and adjusting our exposure based on the prevailing economic wins.

• Speaker #1

  The fourth principle is to use gold as a counterbalance to stocks.

• Speaker #0

  We've touched upon this throughout our discussion. Gold has those unique characteristics that make it a valuable diversifier.

• Speaker #1

  Exactly. Gold's historical role as a store of value and its tendency to perform well during periods of uncertainty make it an effective hedge against stock market downturns.

• Speaker #0

  So instead of just holding stocks and hoping for the best. we're strategically adding gold to the mix to potentially smooth out the ride.

• Speaker #1

  The fifth and final principle is to rebalance our portfolio regularly.

• Speaker #0

  We talked about the importance of rebalancing earlier. It's about maintaining our desired asset allocation and adjusting to changing market conditions.

• Speaker #1

  Exactly. By periodically rebalancing, we can ensure that our portfolio stays aligned with the current phase of the secular cycle and our overall investment goals.

• Speaker #0

  All right. So we've got the five principles of Secular-driven portfolio construction. Now, what are some of the potential benefits of this approach?

• Speaker #1

  One benefit is enhanced risk management. By recognizing the cyclical nature of markets and incorporating gold as a counterbalance, we can potentially reduce the severity of portfolio drawdowns.

• Speaker #0

  That's a big one, especially for long-term investors who can't afford to see their portfolio get decimated by a sudden market crash.

• Speaker #1

  Another benefit is the potential for higher long-term returns. By aligning our portfolio with the prevailing secular trend, we can capitalize on the strengths of different asset classes and potentially outperform a static buy and hold approach.

• Speaker #0

  So it's not just about protecting our downside. It's also about maximizing our upside by being in the right assets at the right time.

• Speaker #1

  Exactly. And by incorporating gold, we can also benefit from its potential to outperform stocks during certain market environments.

• Speaker #0

  Like those periods of heightened uncertainty we discussed earlier.

• Speaker #1

  Right. Now, it's important to acknowledge that this approach isn't without its challenges.

• Speaker #0

  Of course. No strategy is perfect. What are some of the hurdles we might encounter?

• Speaker #1

  One challenge is identifying the current phase of the secular cycle accurately. The SMI can be a helpful guide, but it's not infallible, and there's always the risk of misinterpreting the signals.

• Speaker #0

  So we need to be humble and recognize that we don't have a crystal ball.

• Speaker #1

  Another challenge is implementing the strategy effectively. It requires discipline and patience, and the willingness to make adjustments as market conditions change.

• Speaker #0

  It's easy to get caught up in the emotions of the moment and deviate from the plan. But sticking to the strategy through thick and thin is crucial for its success.

• Speaker #1

  Well said. Now, before we wrap up this deep dive, I want to emphasize that Peterson's research is just a starting point. It's a framework for thinking about markets and portfolio construction in a different way.

• Speaker #0

  It's a new lens through which to view the investment landscape.

• Speaker #1

  Exactly. And while the SMI and the concept of secular cycles are valuable tools, they're not meant to replace our own judgment and critical thinking.

• Speaker #0

  So, as with any investment strategy, It's crucial to do our own research, understand the risks, and tailor the approach to our individual circumstances.

• Speaker #1

  Wise words. This has been a truly fascinating exploration of a very intriguing topic.

• Speaker #0

  It has. And I think our listeners have gained a lot of valuable insights from this deep dive into Peterson's research.

• Speaker #1

  I agree. Remember, investing is a continuous journey of learning and adapting.

• Speaker #0

  And by staying curious and open to new ideas, we can navigate the complexities of the market and achieve our financial goals.

• Speaker #1

  Well said. Now, before we sign off, I'd like to leave our listeners with a thought-provoking question.

• Speaker #0

  Okay, fire away.

• Speaker #1

  If this secular-driven approach can be applied to stocks and gold, what other asset classes might it be effective for?

• Speaker #0

  That's a great question for our listeners to ponder. Could we apply similar principles to other assets like bonds, real estate, or commodities?

• Speaker #1

  Food for thought. It's a testament to the power of Peterson's research. that it sparks such intriguing questions and opens up new avenues for exploration.

• Speaker #0

  Well, on that note, we'll wrap up this episode of Papers with Backtest podcast. We hope you found this deep dive into when to own stocks and when to own gold insightful and thought-provoking.

• Speaker #1

  As always, we encourage you to explore the research further and see how it might fit into your own investment philosophy.

• Speaker #0

  Remember, there's no one-size-fits-all approach to investing. What works for one person might not work for another.

• Speaker #1

  The key is to find an approach that aligns with your goals, your risk tolerance, and your understanding of the market.

• Speaker #0

  And to always stay curious, keep learning, and keep evolving as an investor.

• Speaker #1

  Well said. Until next time, happy trading.

• Speaker #0

  Thank you for tuning in to Papers with Backtest podcast. We hope today's episode gave you useful insights. Join us next time as we break down more research. And for more papers and backtests, find us at https.paperswithbacktest.com. Happy trading.