In August, we saw a substantial market correction, which prompted an interesting analysis by 538 on whether to sell or to hold during a market panic, i.e. when the S&P suffers a big decline. The folks at 538 propose that holding your assets is better than selling during the panic and buying back later.
To illustrate the point, they simulated a trader who sold SPY upon downturns of 5% and bought back upon rebounds of 3%. But that's just one set of parameters, so I wrote an algorithm to let users test out any variant of this strategy.
Going further, I wanted to find out whether a variant of this strategy exists that a lay investor (which I loosely think of as a person who does not have the time or resources to create a sophisticated trading strategy, and instead makes decisions simply based on SPY price movements) can use to beat the market, especially in times of economic downturn.
To do this, I ran over 5000 different backtests, iterating over a vast variety of possible drawdown and rebound values. My results showed that such a parameter-optimized strategy can generate significantly market-beating returns. However, closer inspection revealed that this was solely a consequence of its superior performance during the recession, and that the parameters were effectively dangerously overfit to this single event. I do not think that the next economic downturn will be similar enough to the previous ones for these optimized parameters to be useful for prediction. As such, I conclude -- perhaps unsurprisingly -- that there's no simple strategy to ensure market-beating returns in times of economic downturn. I end up agreeing with the folks at 538: if you're invested in SPY and don't have the opportunity to construct a sophisticated strategy, you may as well hold on to it.