Opinion – Grain in Grain: We simulated a stock exchange strategy that yielded 3500%

One of the biggest doubts of investors is about the best time to have or increase exposure to the stock market. Without an indicator that signals the appropriate moment, the investor ends up applying when the market has already risen too much and exiting when it has already fallen. This behavior ends up resulting in long-term losses. Therefore, it is very important that every investor has a well-structured strategy.

Without a well-defined strategy, the investor is lost with the excess of information and market volatility. Therefore, it is essential to monitor indicators that guide investment.

In this sense, I commented last Sunday about an indicator that is easy to assemble and follow. This indicator signals the moment to have exposure or even to increase participation in stock exchanges with good effectiveness in the past. Read about this strategy at the link.

Several readers questioned what would be the return of this strategy in the long term. Therefore, I made some simulations and present them below.

I simulated using only the Ibovespa, which could be replaced by any passive fund in the index, and the CDI, which could be replaced by a liquidity fund or CDB yielding 100% of the CDI. I used the period from 2001 to August 2022 for the simulation.

In the last two decades, this indicator has provided a market entry signal five times. The graph above shows, in blue, the moments when the investor should have had exposure to the stock market in the past.

The outcome of the strategy depends on the desired exposure to the market. The greater the risk, that is, the participation in the stock exchange at the indicated times, the greater the return.

The table above shows the gain of this strategy for each chosen percentage of exposure on the stock exchange.

The gain resulting from this strategy ranged from 118% of the CDI to 356% of the CDI.

The chart below shows the evolution of this strategy (with 100% exposure on the stock exchange at the indicated times), of the CDI, and of the Ibovespa.

It is possible to see that the decision for the strategy is much more appropriate than keeping a position always long in the stock market as many indicate.

At this point, you may ask yourself: what would the strategy recommend now, since it is not known what the Selic will be in the next 12 months?

For this, it is necessary to create a future scenario and compare with the past Selic.

The Selic in the last 12 months ending in August was 10% per year. The indicator would suggest having exposure if the Selic rate in the next 12 months is lower than this rate.

If you believe that the Selic rate will be lower than 10% in the next 12 months, it may be a good time to increase exposure on the stock exchange. Otherwise, better wait.

I emphasize that this is just a simulation of one of the possible strategies that can be adopted by the investor. Like any strategy, this one will not guarantee positive results every time.

Therefore, pay attention to the investor profile when deciding on any risky investment.

Michael Viriato is an investment advisor and founding partner of Investor’s House

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