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In a sense it is an attempt at capturing the momentum regardless of what the drivers are. Sometimes it just makes sense to join the bandwagon.
 

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Discussion Starter #42 (Edited)
I agree, it's a momentum strategy.

Here are 19 year performance numbers for the method I described in post #28. I'm using stockcharts for all of this, which shows total return including dividends. To start with here is performance of the individual indexes from 2001-01-01 to now
SPY is 6.7% CAGR
EEM is 8.4% CAGR
Average of two is 7.6% CAGR, maybe a little bit more with annual rebalancing

OK so that's our baseline. How did the strategy in #28 do?

According to my calculation the result is 9.2% CAGR which is higher than either one individually. It's 1.6% CAGR better than passively holding both of the above. Perhaps more importantly it avoids the long stretches of stagnant returns in each one since it (by design) does not tolerate poor returns.

So I think, behaviourally, it's pretty easy to execute and this appears to have given a pretty significant performance advantage over the last 19 years.

SPY alone6.7% CAGR
EEM alone8.4% CAGR
SPY+EEM avg7.6% CAGR
#28 method9.2% CAGR
 

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The results look pretty good. One could also compare to the global weights of US and EM, 5 to 1, so the weighted average would be 7%; a difference of 2.2% which is even better.

For some peculiar reason I was expecting a bigger outperformance, given that the strategy would have been in EM in the aughts and in the US more recently. But the results are good regardless.

The EM and EAFE had great returns in the 2000's when the US basically didn't do much. In the past decade the US has done well, while EM and EAFE have been stagnant. Maybe there is a pattern there....

The results are comparable to those of SSO+IEF that you have presented in Post #1.
 

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Discussion Starter #44
Yes I also expected a larger difference but what happens is that when the market theme changes between them, you miss out on 1 or maybe 2 years of awesome performance with the new star. I suppose that a 'pathological case' would happen if no theme stays consistent, and you just keep swapping between each, causing all kinds of trading (severe whipsawing). That would be unfortunate.

For this to work, some region like emerging, or the US, has to consistently outperform for a span of years.

Interesting that the result got close to the SSO+IEF method. Compared to that, I like this method better. No exotic ETFs and no dependence on the US market either.

I wonder if there's anything meaningful in all of this, in other words, any promise going forward?
 

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That makes sense: the signal comes on after consistent outperformance by the laggard. I wonder if the instead of trailing 4 years we compare trailing 2-year returns. Perhaps an earlier signal but more possibility of whipsaw.

No doubt the results are impressive.
 

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Discussion Starter #46
Topo this may be a question that has no answer, but how do you think one can distinguish between strategies that (a) work for some fundamental reason, versus (b) random accidents of back-testing?

It's easy to craft an explanation post hoc. Humans are really good at this. We could see a completely random sequence of things, and still craft a plausible story of what's going on -- which would be garbage.
 

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It is difficult to distinguish. But if the findings on the back-test can be replicated on out-of-sample series then there is a higher possibility that there is a fundamental reason behind it.
 

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Discussion Starter #48 (Edited)
It is difficult to distinguish. But if the findings on the back-test can be replicated on out-of-sample series then there is a higher possibility that there is a fundamental reason behind it.
Thanks. Yes, right, if one can use another dataset (perhaps parallel or related data, or other time spans) and see similar results, that suggests that the approach or model is valid.

I did a quick test using Canadian sectors. I pulled up some big ones (XFN, XEG, XIT, XMA, XRE) and tried the same exercise, and again the results are very good, far in excess of XIU. So it does appear that this momentum method works more generally. However this exercise also showed me a couple things that are worth noting,

- drawdowns can potentially be severe because we're losing diversification
- it only "works" when there are long stretches of a consistent theme

Currently, I think the second point is the main downside of the method. When applied to the Canadian sectors for example, one gets into XIT (tech sector) for the last few years, with tremendous gains. But for a span of years such as roughly 2010 - 2014 when there was no clear outperformer, the results are quite muddy. You generate trades and bounce between sectors, not showing anything for it. Instead it is specifically the years 2002 - 2008 (XEG) and 2015 - now (XIT) which produce the amazing performance.

Instead if you only started doing the method around 2009 you would go quite some years and feel stupid. You would likely underperform the index and wonder why you're bothering with any of it.

It could be that we just got lucky that there have been two long lived sector themes since 2000, which give the opportunity to ride momentum. I'm sure this will not always happen.

Similarly on the global scale (with my SPY vs EEM idea) one benefits from two long lived themes spanning many years each. But again, I would not expect that to always happen. One could imagine you might enter a stretch of say 5 or 10 years where you keep bouncing between ETFs each year, seemingly for no benefit. That situation would exhaust the speculator, leading to disillusionment, etc.

But... that's the classic problem with any active method of course. I love this interplay of statistics, modeling, and human psychology. It takes amazing self discipline and commitment to method to actually succeed with any of this. It also takes resilience to peer pressure and external influences. I keep thinking of how much this board has tried to talk me out of my modest allocation to gold, for example.

Still, I'm doing it :) It's already in my investment plan for my global stock allocation. Still obeys all % targets of my asset allocation plan.
 

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I wonder if it could be improved by a stop-loss mechanism such as a moving average. That way one could potentially tap the upside while further minimizing the downside.
 

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Discussion Starter #50
I wonder if it could be improved by a stop-loss mechanism such as a moving average. That way one could potentially tap the upside while further minimizing the downside.
I tried merging the SPY/EEM momentum method with my technical market timing method (which I described a bit on page 3). This should reduce the severity of the drawdown. In this back test I'm starting at Jan 2006 (note it's a different time period than earlier) and calculating performance of the momentum method + market timing.

Combined technical method gives 10.4% CAGR
Buy and hold SPY was 9.0%
Buy and hold EEM was 4.8%

I think this is nice. We've gained some downside protection but are still above the buy & hold SPY performance, which is hard to get. The risk adjusted return is way better.

Here's another time period with the same method. Now centered into middle years 2007 - 2015 to exclude some of the very strong years in both EEM and SPY. Let's see if the method still gives a benefit.

Um, yeah, it does:

Combined technical method 12.0% drawdown roughly -20%
Buy and hold SPY was 6.3% drawdown -55%
Buy and hold EEM was 0.0% drawdown -66%

Holy hell. And there is less drawdown with the combined technical method. Risk adjusted return advantage is through the roof.

I'll have to double check these results.
 

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Discussion Starter #51
And a bad result too for completeness: if you start after 2009, the method underperforms S&P 500. That's because there has been virtually no volatility, and SPY has been consistently strong (one consistent theme). So the technical methods cannot benefit from weakening or leadership changes. Any trades you end up doing hurt performance.

Then again, all hedge funds have done poorly after 2009 due to the S&P 500 just going straight up. So it's not surprising that this method would also suffer under those conditions.
 

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It's hard to consistently beat a buy-and-hold strategy. But if one could reduce the downside, even a smaller upside could result in an acceptable risk adjusted return. This would be a particularly desirable outcome if it happens out of phase with the market in general. The holy grail would be to achieve a negative correlation with positive expected return.
 

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James here is a method using leverage & the 200 day moving average that has returned an average annual return of 26.8% from Oct 1928 till Oct 2015 instead of an average return of 9.1 % average 5 trades a year. 10,000 would have grown into 9 trillion

Simply long S&P 3x leveraged etf when S&P is above 200 day moving average sell when below

source 2016 Dow award Leveraged for the long run Michael A Gayed CFA & Charles Bilello
 

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significantly higher than pure IVV at +16.6% ... seemingly with no extra risk.

Thoughts? Personally I have trouble holding a derivative-based exotic ETF (SSO) but I find these numbers very interesting.
I would, but not now. I would buy such a security if we had a serious bear market and value was high. There was a story recently about a guy who bought two such products in the depths of the financial crisis '09. he still holds them and is sitting with a huge - now a millionaire - profit. Hope he sells and doesn't do a round trip.
 

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Discussion Starter #55
There was a story recently about a guy who bought two such products in the depths of the financial crisis '09. he still holds them and is sitting with a huge - now a millionaire - profit. Hope he sells and doesn't do a round trip.
The problem with that is that they never write stories on guys who bought leveraged things and traded them badly, or which blew up on them. An example would be all the people chasing the high returns in XIV until it blew up and they lost everything. Or the people who used these leveraged/inverse ETFs with horrible returns for many years.

Those never turn into media stories. So when you read these stories on the extremely rare success cases, it paints a misleading picture.
 

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The problem with that is that they never write stories on guys who bought leveraged things and traded them badly, or which blew up on them.

An example would be all the people chasing the high returns in XIV until it blew up and they lost everything ...
Those never turn into media stories ...
Odd that it's easy to find articles that "never" get written.
https://www.marketwatch.com/story/xiv-trader-ive-lost-4-million-3-years-of-work-and-other-peoples-money-2018-02-06
https://www.tradingsitereviews.com/learning-the-hard-way-3-traders-who-lost-everything/


Then there's the general advice:
https://www.kiplinger.com/article/investing/T022-C009-S001-run-don-t-walk-from-leveraged-etfs.html
https://money.usnews.com/investing/funds/articles/2018-04-18/leveraged-etfs-are-a-losers-game
https://thecollegeinvestor.com/4414/leveraged-etfs-dont-match-market-performance/
https://www.fool.com/investing/general/2014/11/02/heartbreaking-lessons-from-regular-joes-who-lost-i.aspx

Less recent examples
https://hardbacon.ca/en/article/nawar-alsaadi-lost-won-millions-stock-market/

IIRC, there was a whole series of G&M articles in early 2000's.



... So when you read these stories on the extremely rare success cases, it paints a misleading picture.
Where people are focused on what they prefer and exclude other info ... other info is ignored.


Cheers


PS
I should make clear that I am in agreement that the true successes are rare and that most people pay attention to the stories about the success.

Those who read broadly with an open mind will also notice the stories about those who crash/burned.
 

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The problem with that is that they never write stories on guys who bought leveraged things and traded them badly, or which blew up on them. An example would be all the people chasing the high returns in XIV until it blew up and they lost everything. Or the people who used these leveraged/inverse ETFs with horrible returns for many years.

Those never turn into media stories. So when you read these stories on the extremely rare success cases, it paints a misleading picture.
good point.
 

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Discussion Starter #58 (Edited)
It's true that there's some media coverage of the failures. One of those linked above is amazing: the guy lost $1.5 million of friends and family's capital in XIV.

I try to remember these stories every time I experiment with a new strategy, including the ones I wrote about in this forum. What is the blowup danger? Of those I wrote about in this thread, I still don't like the SSO or leveraged ETF routes. I do, however, like the simpler momentum methods on broad global ETFs and using some basic technical analysis. No leverage or exotic vehicles; it's doable.

Here's one of a slightly more professional failure. There's a video too
https://business.financialpost.com/investing/wiped-out-hedge-fund-manager-confessed-his-losses-on-youtube

 

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Discussion Starter #59 (Edited)
I agree, it's a momentum strategy.

Here are 19 year performance numbers for the method I described in post #28
. . .

SPY alone6.7% CAGR
EEM alone8.4% CAGR
SPY+EEM avg7.6% CAGR
#28 method9.2% CAGR
Leaving aside the market timing via technical analysis, and going back to this basic idea of chasing performance in the currently strong global index. Again, this seems like an awfully simple method to boost returns which also causes minimal churn. In fact it would have resulted in simply holding SPY continuously since 2014, which is perfect.

Is there any good reason to not do this? I really don't see the down side, other than losing some diversification in global stocks.

My counterargument to the diversification point is that most global exposure is already heavily weighted into the US, so global indexing is dominated by the US. In my view, being able to switch between these regions could actually be safer (long term) by reducing sole dependence on the US. Albeit with more short term volatility. Imagine for example that we enter a decade or two where the US performs horribly versus Europe, Japan, emerging, whatever.

IMO this is a direct parallel to Japan in the late 80s. By 1989, maybe even earlier, Japan was the largest stock market by market cap globally. If we had been looking at couch potato or XAW back then, they would have been very heavy in Japan. Think about that: XAW with its heaviest weight in Japan. That was the world in 1989.

Surely an investor who could dynamically adjust would have been better off than keeping that heavy allocation to Japan as it entered chronic underperformance.
 

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Discussion Starter #60
But what if I told you that you can leverage the S&P 500, passively, without increasing risk? We'll have to ignore the inherent risk in SSO for a moment.

Consider 50% SSO + 50% IEF, a treasury bond fund which acts as a safe haven.
Portfolio analysis at Portfolio Visualizer
Still the most interesting strategy that I'm afraid to try.

The 2019 result would have been 35.74% which beats the S&P 500 at 31.25%.

Long term performance is 10.80% CAGR versus the S&P 500 at 8.75% so that's a couple percent higher annual performance, with (seemingly) less downside risk. I still wouldn't do it, but interesting.
 
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