Optimal Goals-Based Investment Strategies for Switching between Bull and Bear Markets

We solve a dynamic, long-horizon, goals-based wealth management problem, given different investment regimes. In a world with a good regime (bull market) and a bad regime (bear market), an investor who is cognizant that regime switching occurs has the potential to do better than an investor who assumes only one regime. However, models with more than one regime incur the additional risk of regime uncertainty. Investors must be able to predict which regime is governing the market with reasonable levels of confidence, or they can be worse off than investors who assume just one regime. Using data from recent history, we develop a framework that determines how accurate regime prediction needs to be to achieve gains from a regime-cognizant goals-based investing approach.