12-Month High Switch (Meb Faber)

The 12-Month High Switch is a trend rule from Meb Faber's Cambria paper "All Time Highs. A Good Time to Invest? No. A Great Time.", written around 2020. It splits the money equally across US stocks, foreign stocks, real estate, gold, and commodities, and holds each one only while it is within 5% of its highest price of the past year; otherwise that fifth moves to 10-year Treasuries.

The idea#

Many investors are nervous about buying when a market is at or near a record high. Faber's paper argues the opposite: markets near their highs are usually in uptrends, and trends tend to persist. A market that has fallen well below its high is already in a drawdown that can get much deeper.

So the rule simply asks, once a month, whether each asset is close to its recent high. It is a cousin of the channel breakout systems used by trend followers for decades, and of Faber's own 10-month moving average rule. The paper also tested the same switch using the all-time high instead of the 12-month high.

How it works#

The portfolio holds five equal slices of 20%:

• US stocks (SPY)
• Developed-market stocks outside the US (EFA)
• US real estate (VNQ)
• Gold (GLD)
• Commodities (GSG)

At the close of the last trading day of each month, each slice is checked on its own. If the fund's price is at least 95% of its highest close over the past 252 trading days, the slice holds the fund. If it is further below its high, the slice holds 10-year Treasuries (IEF) until the fund gets back within 5%.

Faber measures the 12-month high from month-end prices. This version uses daily closes, so the high can be a little higher and the test a little stricter.

What the backtest shows#

The ETF-era test starts in July 2007. Over that stretch the switch compounded at under 6% a year with a worst drawdown of about 19%. The S&P 500 returned about 11% a year but fell more than half, and a 60/40 portfolio returned about 8% with a worst drawdown of about a third. The switch beat the S&P 500 on risk-adjusted return but trailed the 60/40 portfolio on both return and risk-adjusted return.

Its best moment was 2008, when it gained about 21% as assets fell away from their highs and their slices moved into Treasuries, while the S&P 500 lost 37%. The flip side came in 2009: it re-entered late and ended the year slightly down while stocks rose 26%.

Its worst drawdown came from September 2021 to October 2022. Treasuries, its safe asset, fell along with stocks and real estate, and it took until October 2024 to recover. It lost 14% in 2022. Since the paper, it has returned just over 5% a year.

With simulated history the test starts in late 1980. Over that longer period it compounded at about 9% a year, below the S&P 500's return but with a much higher risk-adjusted return, and 2022 remained its worst drawdown. It gained in each of 2000, 2001, and 2002 while US stocks fell, and 16% in 2002 alone.

When it struggles#

• Sharp rebounds. After a crash, assets can rise a long way before they get back within 5% of their highs, so it re-enters late.
• Falling bonds. The safe asset is 10-year Treasuries, which offer no shelter when rates rise quickly, as in 2022.
• Strong US stock markets. Only a fifth of the portfolio is ever in US stocks.

Using it on Tactfolio#

The live strategy above runs the rule on daily data with a 252-session high. Copy it to use Treasury bills as the safe asset, change the 5% band, or compare it with the moving-average version, GTAA 5.

Year by year

* Partial year.

The rules as implemented

This is the exact tree Tactfolio runs, rebalanced monthly with signals and trades at the close. Open it to inspect or copy it.

Sources and caveats

• Meb Faber, All Time Highs. A Good Time to Invest? No. A Great Time. (Cambria)
• Meb Faber, All Time Highs (SSRN)

• Each asset is held while its close is at least 95% of its highest close over the past 252 trading sessions, else 10-year Treasuries, at a fixed 20% each, as in the paper's five-asset portfolio.
• The paper measures the 12-month high from month-end closes; this version uses daily closes, whose high is at least the month-end high, so the test is slightly stricter.
• SPY, EFA, VNQ, GLD, GSG, and IEF stand in for the paper's US stock, foreign stock, REIT, gold, commodity, and 10-year Treasury series.
• Signals and trades use the close of the last trading day of each month, as in the source.

Common questions#

What is the 12-Month High Switch?#

It is Meb Faber's rule to hold an asset only while it is within 5% of its highest price of the past 12 months, and otherwise hold 10-year Treasuries. His portfolio applies it to five asset classes at 20% each.

Is it a good idea to invest at all-time highs?#

Faber's paper found that markets near their highs usually kept rising, and that avoiding markets well below their highs cut drawdowns. On this backtest the switch had much smaller losses than the S&P 500 but also lower returns.

What ETFs does the 12-Month High Switch use?#

SPY, EFA, VNQ, GLD, and GSG, with IEF as the safe asset.

How is it different from a moving average strategy?#

A moving average rule asks whether the price is above its recent average; the 12-month high rule asks whether it is close to its recent peak. GTAA 5 uses the moving average on a similar list of asset classes, with Treasury bills as cash.

Related strategies

• Faber’s 10-month moving average timing model
• Gold Cross-Asset Momentum (Quantpedia gold and Treasury rule)
• Trending Fast and Slow (volatility-switched momentum)
• Leverage Rotation Strategy (LRS): UPRO above the 200-day average