The Barometer Capital Report has been published since January of 2004. Therefore, performance statistics for the Barometer Strategy since that time are a matter of public record. For prior years, we have back-tested the system to determine the hypothetical performance of the Model Portfolio at the time.

It should be noted that such back-testing does not involve making subjective judgments after the fact. The calculations for the Stock and Bond Barometers, as well as their use in the dynamic asset allocation process, are strictly quantitative and objective in nature. As long as the calibration of the underlying econometric equations involves only historical data available at the time, such back-testing should be solidly representative of the performance of our strategy had it been in place at the time.

Here are some performance statistics for the five-year and ten-year periods ending December of 2007.

Comparison statistics are presented for three fixed allocation strategies. “Fixed 60/40” refers to a portfolio consisting of 60% stocks and 40% bonds. This represents a particularly good benchmark for gauging the performance of the Barometer Strategy, because it is diversified across both stocks and bonds and it exhibits a risk (volatility) very similar to our Model Portfolio. It is also generally representative of the allocation strategy adopted by many pension funds and, therefore, reflective of the results achieved by professional investment managers.

Focusing on the ten-year period, the Barometer Strategy’s return of 13.0% out-performed each of the fixed allocation strategies by more than 75%. Moreover, this was accomplished without exposure to excessive risk. The Barometer’s Sharpe ratio of 1.02 (a measure of return-versus-risk) exhibits a value more than double that of the alternative portfolios. This is further evidenced by the Barometer Strategy experiencing no annual losses over this time period, despite the three-year bear market for stocks from 2000 through 2002.

This superior performance is also illustrated in the following annual comparisons.

As shown, compared to the S&P 500, the Barometer Strategy delivered superior returns at lower risk by sidestepping the disastrous bear market of 2000-2002. It achieved this by reallocating from stocks to bonds in 1998 and 1999.

The Barometer Strategy out-performed the Fixed 60/40 portfolio (exhibiting similar risk characteristics) in seven of the ten years.