In 2022, TLT (the long-term US Treasury bond exchange-traded fund, or ETF) lost 31.2% with dividends counted. A one-line rule, run on past prices, would have sold it in February 2021 and moved the money into Treasury bills. These are US government loans repaid within a year. The rule would have made 2.0% in 2022.
That rule is a small example of systematic investing. It held the fund only while its 12-month return was above zero. On gold, the same rule trailed simply holding gold. Here is what systematic investing is, its four parts and what one rule did on bonds and gold from 2017 to 2026.
What is systematic investing? Systematic investing means making investment decisions with written rules that are tested on past data, then followed the same way every time. The rules say what to buy, how much to put in, when to sell and when to review the record.
A system has four parts: a signal that says when to buy, a position size, an exit and a review.
In a backtest, a test of the rules on past prices, one rule held a US government bond fund only while its 12-month return was above zero. In 2022 it made 2.0%. The fund lost 31.2%.
Rules do not remove risk. On gold, the same rule's worst fall from a peak was 28.6%, against 26.4% for simply holding gold. The rule also ended behind holding gold from 2017 to 2026.
What is systematic investing?
Systematic investing turns each investment decision into a written rule. The rules are tested on past prices before any money goes in. Then they are followed every time, whatever the news. Two people running the same rules on the same data reach the same decision.
Rules-based investing is the same idea. We build a portfolio from three written rules in What Is Rules-Based Investing?. Quantitative investing is one way to write the rules, using statistics and computer models.
The four parts of every systematic investing strategy
Every system answers four questions in writing, before the first trade:
Signal: what data says buy? For example, a price that has risen over the past year.
Position size: how much money each position gets. It can be a fixed amount or an equal slice of the portfolio.
Exit: what ends the position? It is written down in advance, never decided in the middle of a loss.
Review: when is the record checked against the test? Any change to the rules is tested first, then replaces the old version on a set date.
The testing step is called a backtest: running the rules on past prices as if they had been traded. We explain how it works and how it can mislead in What Is Backtesting?
Systematic vs discretionary investing
Discretionary investing means a person judges each decision as it comes. It can react to events no rule was written for, such as a takeover. But judgement is hard to test on past data. A rule can be rerun on any past year.
A systematic approach can be tested and repeated. It will also miss anything its rules do not measure. We review the published evidence on rules against judgement in Systematic vs Discretionary Investing.
A worked example: a 12-month rule for a bond fund, written out
Here is a complete system for TLT:
Signal: on the last trading day of each month, work out TLT's return over the past 12 months, with dividends counted.
Position size: if that return is above zero, all of the money goes into TLT.
Exit: if it is zero or below, sell TLT and hold 3-month Treasury bills.
Review: none during the test. The rule is judged on its whole record.
Each switch happens at the close of the next trading day. It is a simpler version of the 12-month rule studied by Tobias Moskowitz, Yao Hua Ooi and Lasse Pedersen in Time Series Momentum (2012), across 58 futures markets. Here the rule holds either the fund or Treasury bills. Results are before costs unless stated.
When the 12-month rule held TLT, 2017 to 2026
Source: YX Insights price data; YX Insights
The chart starts in August 2016, because the first check, on 31 August 2017, needs 12 months of prices behind it. The shaded months are when the rule held TLT. It held the fund at 47 of 109 month-end checks. That is 43% of the time. The longest spell out ran from the 26 February 2021 check to the 29 December 2023 check. Over that stretch, TLT lost 25.8% while the rule, sitting in Treasury bills, gained 7.3%.
The rule acts on the number, however small. The table shows the last six checks. In April 2026, TLT's 12-month return was 0.05%, so the rule bought it.
Month-end check | TLT 12-month return, dividends counted | Rule holds for the next month |
|---|---|---|
31 March 2026 | −0.48% | Treasury bills |
30 April 2026 | 0.05% | TLT |
29 May 2026 | 3.92% | TLT |
30 June 2026 | 2.40% | TLT |
31 July 2026 | −1.05% | Treasury bills |
31 August 2026 | −0.33% | Treasury bills |
Source: YX Insights price data; YX Insights
The 12-month rule vs holding TLT: growth of $10,000
Source: YX Insights price data; FRED (DTB3); YX Insights
From 31 August 2017 to 24 September 2026, $10,000 in the rule grew to $10,859. The same $10,000 left in TLT fell to $8,062. The rule's worst fall from a peak, called its drawdown, was 24.2%. Holding TLT had a worst drawdown of 48.3%, from August 2020 to October 2023.
The rule switched 16 times in nine years. Charging 0.1% of the money on every switch cuts the final value to $10,687.
The 12-month rule vs holding gold (GLD): growth of $10,000
GLD (the gold ETF) holds gold bullion. The rule and the dates are unchanged. When the rule is out of gold, it holds Treasury bills.
Source: YX Insights price data; FRED (DTB3); YX Insights
Here the rule lost to holding. Under the rule, $10,000 grew to $24,600. Holding GLD grew it to $31,131. The rule's worst drawdown, 28.6%, was also deeper than the 26.4% for holding gold.
Early 2023 shows why. The rule was out of gold in January, when GLD rose 5.8%. It was in for February, when GLD fell 5.4%. It was out again in March, when GLD rose 7.9%. In 2023 the rule lost 0.5%, while GLD gained 12.7%.
The 12-month rule helped on TLT, which fell for three years. On gold, which rose with sharp dips along the way, it cost money.
Can systematic investing eliminate risk?
No. A system changes the risks you carry. It does not remove them.
It reacts late. The rule checks once a month and looks back 12 months. It held TLT through a 16.0% fall, from the August 2020 peak to the February 2021 check.
It can whipsaw. A whipsaw is a switch that is quickly reversed. Since the end of 2023, TLT's 12-month return has hovered near zero. The rule switched 12 times in that stretch. It lost 15.4%. Holding TLT lost 10.0%.
Past rules can stop working. A rule fitted to one stretch of history may fail on the next.
How to judge a systematic investing strategy
Ask these of any system, ours included:
Are the rules written in full, before the test?
Is it compared with holding the same assets?
Are costs and the number of trades shown?
What was the worst drawdown?
Was it tested on data it was not built on? We walk through one report in How to Read a Backtest.
For how we test our own models, see Right for years: edge or luck?. Can Systematic Investing Beat the S&P 500? tests one rule against simply holding the index. Why Combining Models Beats Picking One puts several rules to a vote.
Systematic investing is investing by written, tested rules, followed every time. In our backtest, one rule sidestepped the 2022 bond fall but trailed holding gold over the same years. So judge any system on its whole record, costs and worst falls included.
Learn more with YX Insights
This explainer is part of the YX Insights Academy. Each one takes a single idea and checks it against real data.
The same approach runs through everything else we publish:
Systematic Portfolio: ready-made portfolios for Macro & Megacaps and for Commodities. We publish the holdings and every change.
Multi-model Signals: a daily long-or-flat call on every name we cover. Each call shows how strongly our four models agree.
Research: company deep dives, macro commentary and essays on how we test.
Good places to start on the website:
Academy: more explainers like this one.
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Macro & Megacaps Systematic Portfolio and Commodities: the two portfolios in detail.
Track record: live results since 3 August 2026, plus the ten-year backtest.
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DISCLAIMER: This article is strictly educational. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.