Dual Momentum Investing

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JoMoney
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Re: Dual Momentum Investing

Post by JoMoney »

Rodc wrote:...what in the world is an 800 year back test? And how accurate is it?
http://www.dualmomentum.net/2015/01/and-winner-is.html
...authors looked at 84 equities, fixed income, commodities, and currencies markets as they became available from the years 1200 through 2013...
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
LittleD
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Re: Dual Momentum Investing

Post by LittleD »

Should any international investors wish to look at analysis of Dual Momentum investment alternatives, here
is a recent paper done using how a Canadian might deploy the DM portfolio and how currency fluctuations
can be managed. Enjoy!

http://www.dualmomentum.net/2015/06/dua ... omentum%29
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LHerr
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Re: Dual Momentum Investing

Post by LHerr »

"If you switch from ETF's to the mutual fund equivalents (VTSMX VGTSX VBMFX) you can work back to '97. Sure, in real life you would have to use multiple funds to avoid frequent trading restrictions but it's reasonable for data approximations. 5 month look back, not using any additional cutoff other than VBMFX."

Woofwoof,

I would use the three index funds but for the problem of finding a good low volatile cutoff security that has the same long track record. Do you have a suggestion for something to replace SHY? One option is to go to cash. I want a cutoff other than VBMFX as there are plenty of times when bonds are under-performing SHY. Right now is one of those times so I want to be out of bonds.

What I did not mention in my prior post is the issue of taxes. In a rough calculation, an investor in the 28% tax bracket needs to add approximately 2% annually to the momentum managed portfolio to offset the penalty of short-term capital gains vs. long-term capital gains. Perhaps someone has run a detailed calculation on the tax issue.

LHerr
LittleD
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Re: Dual Momentum Investing

Post by LittleD »

Here are two different sources for more information on Dual Momentum portfolios and historical results.

I have included a recent reviewed research paper on Market Timing with Moving Averages & Momentum.
The author suggests the optimum lookback lengths for Moving Average and Momentum.

http://papers.ssrn.com/sol3/papers.cfm? ... id=2585056

http://www.dualmomentum.net/2015/04/und ... e-and.html
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Yesterdaysnews
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Re: Dual Momentum Investing

Post by Yesterdaysnews »

LHerr wrote:"If you switch from ETF's to the mutual fund equivalents (VTSMX VGTSX VBMFX) you can work back to '97. Sure, in real life you would have to use multiple funds to avoid frequent trading restrictions but it's reasonable for data approximations. 5 month look back, not using any additional cutoff other than VBMFX."

Woofwoof,

I would use the three index funds but for the problem of finding a good low volatile cutoff security that has the same long track record. Do you have a suggestion for something to replace SHY? One option is to go to cash. I want a cutoff other than VBMFX as there are plenty of times when bonds are under-performing SHY. Right now is one of those times so I want to be out of bonds.

What I did not mention in my prior post is the issue of taxes. In a rough calculation, an investor in the 28% tax bracket needs to add approximately 2% annually to the momentum managed portfolio to offset the penalty of short-term capital gains vs. long-term capital gains. Perhaps someone has run a detailed calculation on the tax issue.

LHerr
Taxes are an interesting topic - however don't let the tail wag the dog. I recall my father not selling many of the tech stocks he owned during the tech bubble cause he didn't want to pay cap gains taxes. :oops:
yogiyoda
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Re: Dual Momentum Investing

Post by yogiyoda »

Yesterdaysnews wrote:
yogiyoda wrote:
Martin wrote:
yogiyoda wrote:Trading is zero sum game. Through much of the book’s backtest ETFs did not exist or were not popular. So no one was playing the game. Trading ETFs has become increasing popular lately. Especially after the market crash.

Here are some recent results for the last five years (2010 through first quarter of 2015):

S&P 500 had a CAGR of 14.86%; a max drawdown of -16.26%; Sharpe Ratio of 1.15 and Sortino of 2.01.

a portfolio 70/30 stocks/bonds had a CAGR of 11.94%; a max drawdown of -9.89%; a Sharpe Ratio of 1.34 and Sortino of 2.49.

60/40 had a CAGR of 10.95%; a max drawdown of -7.63%; a Sharpe Ratio of 1.45 and Sortino of 2.80.
K
The book’s GEM timing method with VFINX, VEU, and SHY had a CAGR of 8.75%; a max drawdown of -17.98%; Sharpe Ratio of .72 and Sortino of 1.10.

By the way, the author has no credentials as academic or an investor. He does work hard to give his writing a very professorial tone though. And he does a great job of name dropping actual traders he's met. Personally, I’d weigh the advice of Bogle, Buffett, Bernstein, Swedroe, Ferri etc a little heavier.
Let's run another five years from 2004-2009 and average it with your results. I have back tested as far back as I can download data out of Yahoo and have yet to poke holes. Sure you can Cherry pick some short time frames but I am showing higher returns and lower SD with a momentum approach than with 100% S&P over the last twenty five years. Just for grins I am going to go back to the S&P data from 1950-1990, establish the momentum factors and run it against my 1990-current data for a multitude of funds. This will eliminate the one concern that I have with my testing, that I have used the same data set to optimize and test.

But bottom line, I have yet to poke holes in the concept though in the spectrum of too simple to too complex I believe the simple GEM approach is a bit too simple. There are other tools that can be used to minimize downside and fund switching.
I believe GEM has performed worse (relative to the standard 60/40 portfolio) in the last five years than for any previous five year period. I suspect that it is not a coincidence that occurred when trading asset clases ( ETFs) became popular. Unfortunately GEM can only be tested to the 70s, but take a look at how Absolute Momentum performed from 1937 to 2000 on the author's website. It had lower returns than the market 63 years, only to finally out perform between 2000 and 2009. Since you like the performance of GEM from 2004 to 2015. Try running GEM for Europe ( VPACX), Pacific (VEURX), and short term bonds (SHY) for that time frame. Not only does it perform worse than the market. On a risk adjusted basis it also performs worse than just buying and holding an equal weight of VPACX, VEURX, SHY.
So your hypothesis is that the easy availability of ETFs will reduce the momentum anomaly going forward in the future? Basically, you feel the momentum anomaly will not persist?

I feel one could make the opposite argument, as the momentum anomaly is based on human behavioral factors which easy ETF trading encourages.

I would say if the entire market went passive or robo-advisors took over all accounts I could see the risk of momentum not persisting.
Momentum is actually a more mysterious and subtle force than portrayed in the book. It does not manifest in all markets or in all time periods.Even where it does manifest it is more subtle than the book portrays. I’ve run test on US stocks from 1926 to 2015. The book’s Absolute Momentum guessed the direction of the market incorrectly more than 50% of the time. I’ve run the 800 year back test for the large cap US stocks from 1926 to 2015. Basically, it’s a version of the author’s Absolute Momentum where you short the market instead of sitting in bonds. Buy and hold actually trounced this version of Absolute Momentum. Why? Because momentum actually is not as powerful as the results of a hand picked method chosen in hindsight indicate.

I’ve also looked into the 200 year backtest. For at least nine decades during that time period Momentum underperformed. Why? Because momentum is less pervasive than the author would have you believe. The author’s recommended technique is hit or miss with out of sample data. Especially when excluding 2008 where pretty much all momentum techniques worked great globally.

Now, consider that although human nature does not change, the markets do. They reflect not only human nature but also reflect the changing collective wisdom of the market participants as well as the changes allowed by innovations in technology. Realize that Mr Antonocci is not presenting anything new. He’s just packaging old news in a way to appeal to the Boglehead crowd. Momentum trading has been practiced with stocks for decades. Since the crash, momentum trading with Asset Classes (ETFs) has become very popular, even with institutions. This has changed things. Run some thought experiments to see what having many people buying when you want to buy and sell when you want to sell has on your returns. And realize that there are people who try to take advantage of known trading patterns. I feel confident in predicting lower returns for GEM going forward. Can it still beat the benchmarks? Sure. But it can also under-perform.

Are there better ways to trade momentum than GEM? Maybe, but there are other forums where you’ll find more like minds. Also, if you find something you really like, you probably want to keep it close to your vest. Trading is a zero sum game. For Bogleheads looking to lower downside risk, something like Swedroe’s Reducing the Risk of Black Swans would probably be more appealing.
Last edited by yogiyoda on Fri Jun 05, 2015 8:48 pm, edited 2 times in total.
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LHerr
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Re: Dual Momentum Investing

Post by LHerr »

Yogiyoda,

"The book’s Absolute Momentum guessed the direction of the market incorrectly more than 50% of the time."

The above quote caught my eye. By "market" I assume you are referring to the performance of something like SPY, VTSMX, or VTI. Is this a correct assumption.

Antonacci uses a 12-month look-back period and from back-tests I'm aware of, this is too long. Could that be a problem that leads to the 50% error you found? If U.S. Equity (VTI for example) is one of the securities used to populate the Dual Momentum portfolio, then it seems unlikely the error rate would reach the 50% level since VTI tracks the U.S. market.

There are many variables that work their way into back-testing a Dual Momentum portfolio. What is the launch date, what securities are used, how frequently is the portfolio reviewed, what ranking strategy is used, what is the look-back period, what is the correlations between the securities, etc.

LHerr
WoofWoof
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Re: Dual Momentum Investing

Post by WoofWoof »

yogiyoda wrote:I’ve also looked into the 200 year backtest. For at least nine decades during that time period Momentum underperformed.
Under performing a highly volatile market during it's bull runs isn't actually the damning revelation you think it is. I think most people would be perfectly willing to under perform for stretches in order to gain a long term advantage.

Indeed, pretty much everything under performs 100% VFINX from 1986 -1999 (17+% CAGR anyone?)
garlandwhizzer
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Re: Dual Momentum Investing

Post by garlandwhizzer »

I have a very simple point of view on Dual Momentum investing. It purports to do two things: to produce excess gains over simple indexes on historical analysis and to be simple enough for the average investor to employ if he reads the book on how to do it. I suspect that its alpha, if it ever existed at all after costs and especially after taxes in the first place, will quickly be overgrazed and disappear in the future. It is hard for me to believe that any simple formula strategy will not quickly exhaust its alpha in a market dominated by professionals who are aware of how to do it.

On the face of it this DM strategy seems much easier to employ in contrast to the SCV premium where a great deal of debate currently rages on how best to capture it: whether to screen SCV away from negative momentum and negative alpha, whether to add quality to the SCV screen, whether to just get SCV with value and size fully undiluted without regard for alpha or other factors, etc.. The existence of that debate itself suggests that the SCV premium may be less robust and harder to capture than in the past. Much is uncertain when it comes to SCV at least to me but it may well persist into the future, although less dramatically than in the past. On the other hand, the very ease with which DM can be employed will in my opinion clearly doom it to failure in the future. Something that everyone can easily employ for gain will soon run out of gain.

Garland Whizzer
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LHerr
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Re: Dual Momentum Investing

Post by LHerr »

Dual Momentum Investing - How we propose to evaluate the DM model.

1. Several of my Internet friends are running systematic back-tests on the various variables inherent in the DM model. These include Monte Carlo runs showing statistical results that include wide ranges of volatility. Variables under examination include look-back periods, weights assigned look-back periods to access security rankings, portfolio review periods, number of securities to invest at any one time, whether to use mean-variance or semi-variance for volatility calculations, etc.

2. Prepare "virgin" portfolio(s) that will eventually serve as out-of-sample portfolio(s).

3. Employ the model with several portfolios while the back-testing continues. Performance data is tracked for these real portfolios and performance trends are posted on a regular basis. These real portfolios also serve as out-of-sample tests as to the validity of the DM model. Compare performance results with passively managed portfolios.

While there are many nuances to this process, this is a broad overview to testing the DM model.

LHerr
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Yesterdaysnews
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Re: Dual Momentum Investing

Post by Yesterdaysnews »

garlandwhizzer wrote:I have a very simple point of view on Dual Momentum investing. It purports to do two things: to produce excess gains over simple indexes on historical analysis and to be simple enough for the average investor to employ if he reads the book on how to do it. I suspect that its alpha, if it ever existed at all after costs and especially after taxes in the first place, will quickly be overgrazed and disappear in the future. It is hard for me to believe that any simple formula strategy will not quickly exhaust its alpha in a market dominated by professionals who are aware of how to do it.

On the face of it this DM strategy seems much easier to employ in contrast to the SCV premium where a great deal of debate currently rages on how best to capture it: whether to screen SCV away from negative momentum and negative alpha, whether to add quality to the SCV screen, whether to just get SCV with value and size fully undiluted without regard for alpha or other factors, etc.. The existence of that debate itself suggests that the SCV premium may be less robust and harder to capture than in the past. Much is uncertain when it comes to SCV at least to me but it may well persist into the future, although less dramatically than in the past. On the other hand, the very ease with which DM can be employed will in my opinion clearly doom it to failure in the future. Something that everyone can easily employ for gain will soon run out of gain.

Garland Whizzer
Alpha is not the strength of it imo - it is reduced draw-down in bear markets. You side step these events by in large but tend to miss out on the upswing early phase coming out of it as well.

The question of whether momentum anomoly will persist is an interesting one and up for debate. I feel it likely will, as it is based on human behavior and cognitive biases.
Rodc
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Re: Dual Momentum Investing

Post by Rodc »

JoMoney wrote:
Rodc wrote:...what in the world is an 800 year back test? And how accurate is it?
http://www.dualmomentum.net/2015/01/and-winner-is.html
...authors looked at 84 equities, fixed income, commodities, and currencies markets as they became available from the years 1200 through 2013...
:)

Not very meaningful in my estimation. That far back the financial world was a tad different. I'm surprised the author thought that was meaningful.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
Rodc
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Re: Dual Momentum Investing

Post by Rodc »

Yesterdaysnews wrote:
garlandwhizzer wrote:I have a very simple point of view on Dual Momentum investing. It purports to do two things: to produce excess gains over simple indexes on historical analysis and to be simple enough for the average investor to employ if he reads the book on how to do it. I suspect that its alpha, if it ever existed at all after costs and especially after taxes in the first place, will quickly be overgrazed and disappear in the future. It is hard for me to believe that any simple formula strategy will not quickly exhaust its alpha in a market dominated by professionals who are aware of how to do it.

On the face of it this DM strategy seems much easier to employ in contrast to the SCV premium where a great deal of debate currently rages on how best to capture it: whether to screen SCV away from negative momentum and negative alpha, whether to add quality to the SCV screen, whether to just get SCV with value and size fully undiluted without regard for alpha or other factors, etc.. The existence of that debate itself suggests that the SCV premium may be less robust and harder to capture than in the past. Much is uncertain when it comes to SCV at least to me but it may well persist into the future, although less dramatically than in the past. On the other hand, the very ease with which DM can be employed will in my opinion clearly doom it to failure in the future. Something that everyone can easily employ for gain will soon run out of gain.

Garland Whizzer
Alpha is not the strength of it imo - it is reduced draw-down in bear markets. You side step these events by in large but tend to miss out on the upswing early phase coming out of it as well.

The question of whether momentum anomoly will persist is an interesting one and up for debate. I feel it likely will, as it is based on human behavior and cognitive biases.
One concern I have is that mere humans are driving the markets less and less. Folks like you and I, compared to big banks, endowments, hedge funds, etc don't (1) have a large enough share of the market and (2) trade enough to have much influence.

The folks who do have enough money have access to high speed trading, rooms full of PhDs programing computers to automate trading (fast or slow). These folks certainly know all of this. Why would they not arbitrage away the advantage if it is just based on easily exploited biases (vs. real risk)?
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
Martin
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Re: Dual Momentum Investing

Post by Martin »

Rodc wrote:
Yesterdaysnews wrote:
garlandwhizzer wrote:I have a very simple point of view on Dual Momentum investing. It purports to do two things: to produce excess gains over simple indexes on historical analysis and to be simple enough for the average investor to employ if he reads the book on how to do it. I suspect that its alpha, if it ever existed at all after costs and especially after taxes in the first place, will quickly be overgrazed and disappear in the future. It is hard for me to believe that any simple formula strategy will not quickly exhaust its alpha in a market dominated by professionals who are aware of how to do it.

On the face of it this DM strategy seems much easier to employ in contrast to the SCV premium where a great deal of debate currently rages on how best to capture it: whether to screen SCV away from negative momentum and negative alpha, whether to add quality to the SCV screen, whether to just get SCV with value and size fully undiluted without regard for alpha or other factors, etc.. The existence of that debate itself suggests that the SCV premium may be less robust and harder to capture than in the past. Much is uncertain when it comes to SCV at least to me but it may well persist into the future, although less dramatically than in the past. On the other hand, the very ease with which DM can be employed will in my opinion clearly doom it to failure in the future. Something that everyone can easily employ for gain will soon run out of gain.

Garland Whizzer
Alpha is not the strength of it imo - it is reduced draw-down in bear markets. You side step these events by in large but tend to miss out on the upswing early phase coming out of it as well.

The question of whether momentum anomoly will persist is an interesting one and up for debate. I feel it likely will, as it is based on human behavior and cognitive biases.
One concern I have is that mere humans are driving the markets less and less. Folks like you and I, compared to big banks, endowments, hedge funds, etc don't (1) have a large enough share of the market and (2) trade enough to have much influence.

The folks who do have enough money have access to high speed trading, rooms full of PhDs programing computers to automate trading (fast or slow). These folks certainly know all of this. Why would they not arbitrage away the advantage if it is just based on easily exploited biases (vs. real risk)?
A $20 Bill is sitting on the sidewalk. Do you pick it up? Of course not, if it could be picked up someone surely would have already done it.

The fear of it going away is a bit funny if it is indeed driven by behavioral factors. Let's assume you are right and "the big guys" all read the book and start using the GEM portfolio. Nothing would change other than the ideal look-back period would decrease and the volatility would increase dramatically as everyone sells on the same signal. Sound realistic? No, because there isn't just one way nor is the 12 month look-back even the ideal based on studies.
Rodc
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Re: Dual Momentum Investing

Post by Rodc »

A $20 Bill is sitting on the sidewalk. Do you pick it up? Of course not, if it could be picked up someone surely would have already done it.
Non sequitur.

We are not talking about any sure thing like a $20 bill on the sidewalk. If you don't understand this, best of luck.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
yogiyoda
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Re: Dual Momentum Investing

Post by yogiyoda »

LHerr wrote:Yogiyoda,

"The book’s Absolute Momentum guessed the direction of the market incorrectly more than 50% of the time."

The above quote caught my eye. By "market" I assume you are referring to the performance of something like SPY, VTSMX, or VTI. Is this a correct assumption.

Antonacci uses a 12-month look-back period and from back-tests I'm aware of, this is too long. Could that be a problem that leads to the 50% error you found? If U.S. Equity (VTI for example) is one of the securities used to populate the Dual Momentum portfolio, then it seems unlikely the error rate would reach the 50% level since VTI tracks the U.S. market.

There are many variables that work their way into back-testing a Dual Momentum portfolio. What is the launch date, what securities are used, how frequently is the portfolio reviewed, what ranking strategy is used, what is the look-back period, what is the correlations between the securities, etc.

LHerr
For the 1926 backtest, I used the large-cap data from the French library. The same as Antonacci. I believe 10 month outperformed 12 month lookback for this back test. For his backtest to 1970s, 12 month performed the best. Coincidence that he used 10 month for his 1926 backtest and 12 months for his book backtest? I don't think so. Once you start cutting the lookback much shorter than these it can perform better in the short run but will run into more whipsaw losses over the longer test. So he picked lookback lengths that were close to optimal for each backtest.

The point of my comment above was not to argue for optimizing lookback periods. He is correct that you run the risk of over fitting your model. It was to show that momentum is more subtle than the impressions given by the DM book. Small enough changes to the market can easily lower the results to a point where it will underperform even over the course of a full market cycle.
yogiyoda
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Re: Dual Momentum Investing

Post by yogiyoda »

Martin wrote:
Rodc wrote:
Yesterdaysnews wrote:
garlandwhizzer wrote:I have a very simple point of view on Dual Momentum investing. It purports to do two things: to produce excess gains over simple indexes on historical analysis and to be simple enough for the average investor to employ if he reads the book on how to do it. I suspect that its alpha, if it ever existed at all after costs and especially after taxes in the first place, will quickly be overgrazed and disappear in the future. It is hard for me to believe that any simple formula strategy will not quickly exhaust its alpha in a market dominated by professionals who are aware of how to do it.

On the face of it this DM strategy seems much easier to employ in contrast to the SCV premium where a great deal of debate currently rages on how best to capture it: whether to screen SCV away from negative momentum and negative alpha, whether to add quality to the SCV screen, whether to just get SCV with value and size fully undiluted without regard for alpha or other factors, etc.. The existence of that debate itself suggests that the SCV premium may be less robust and harder to capture than in the past. Much is uncertain when it comes to SCV at least to me but it may well persist into the future, although less dramatically than in the past. On the other hand, the very ease with which DM can be employed will in my opinion clearly doom it to failure in the future. Something that everyone can easily employ for gain will soon run out of gain.

Garland Whizzer
Alpha is not the strength of it imo - it is reduced draw-down in bear markets. You side step these events by in large but tend to miss out on the upswing early phase coming out of it as well.

The question of whether momentum anomoly will persist is an interesting one and up for debate. I feel it likely will, as it is based on human behavior and cognitive biases.
One concern I have is that mere humans are driving the markets less and less. Folks like you and I, compared to big banks, endowments, hedge funds, etc don't (1) have a large enough share of the market and (2) trade enough to have much influence.

The folks who do have enough money have access to high speed trading, rooms full of PhDs programing computers to automate trading (fast or slow). These folks certainly know all of this. Why would they not arbitrage away the advantage if it is just based on easily exploited biases (vs. real risk)?
A $20 Bill is sitting on the sidewalk. Do you pick it up? Of course not, if it could be picked up someone surely would have already done it.

The fear of it going away is a bit funny if it is indeed driven by behavioral factors. Let's assume you are right and "the big guys" all read the book and start using the GEM portfolio. Nothing would change other than the ideal look-back period would decrease and the volatility would increase dramatically as everyone sells on the same signal. Sound realistic? No, because there isn't just one way nor is the 12 month look-back even the ideal based on studies.
There is no ideal look-back period going forward. Only ideal look-back period for certain asset classes for certain periods of the past. Doesn't mean it will remain the same going forward. Also, although there are many lookback methodologies, under the right circumstances they can trigger at the around the same time. The basic concepts for all the methods are the same. Also, remember when you shorten your look-back period you run the risk of more whipsaw losses over the long term. You also will increase trading frequency and the accompanying losses through fees, taxes and slippage.
garlandwhizzer
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Re: Dual Momentum Investing

Post by garlandwhizzer »

Yesterdaysnews wrote:

Alpha is not the strength of it imo - it is reduced draw-down in bear markets. You side step these events by in large but tend to miss out on the upswing early phase coming out of it as well.
Good point but it seems to me that if the strategy becomes widely followed, the draw-down in bear markets becomes a crowded trade as everyone rushes to sell on signal. Stock prices therefore decline very rapidly making it a less efficient move for capital preservation. Likewise when the signal is to get back into the market after the bear market decline that also becomes a crowded trade and equity prices skyrocket as investors rush in, increasing the buy in cost for those employing the strategy. Crowded trades, whatever the strategy, tend to arbitrage away any excess gain. Strategies that work well in theory or on backtesting don't necessarily work well in reality if they become widely adopted and utilized in my opinion.

Garland Whizzer
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LHerr
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Re: Dual Momentum Investing

Post by LHerr »

Garland,

Massive trading is unlikely to happen as investors are reviewing portfolios at different times of the month and the look-back periods are not the same for everyone. In addition not everyone is using the same set of ETFs to populate the portfolio nor is everyone using the same cutoff ETF. There are so many variables to consider I think there is plenty of room for the small investor to capitalize on the momentum anomaly.

A problem is likely to arise when an individual is attempting to move large blocks of a particular ETF.

A suggestion for doubters is to set aside a small amount of money and test a momentum model vs. a passively managed portfolio - or just benchmark the momentum portfolio against a passive benchmark.

LHerr
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Yesterdaysnews
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Re: Dual Momentum Investing

Post by Yesterdaysnews »

Yeah it is just an interesting experiment for me. Keeps investing my personal portfolio interesting. You don't have to act on every signal either or you can wait until the performance difference is greater between the asset classes like 5% plus you make the trade. This reduces switching with little effect on return.

Also I am only doing it in the tax-deferred accounts I have as it would otherwise be a high tax strategy (I'm in the highest marginal bracket).
dad2000
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Re: Dual Momentum Investing

Post by dad2000 »

I noticed a lot of activity on this thread, and decided to see what the commotion was about, so I checked out the ebook and read it last night. Interestingly, I once was employed by the author back in the 1980s when he ran his commodities business, but haven't heard his name since then.

The book itself is well written and easy to follow. The first half presents a pretty good history of the markets, covering EMH, factors, smart-beta, etc. It's not unBogleheadish. The only bias is that the author tries to make the case that momentum is more pervasive and easily captured than other factors such as size, value, etc.

As for the system itself, I have two major concerns (which I think have already been covered):
1. The 12 month look back period only generated a few dozen trades over the sample set. Is it pure luck that it hasn't been whipsawed into large losses or is 12 months truly magical?
2. If the 12 months is correct, then in order to stay ahead of the crowd, one would still have to shorten the look back period to get the signals faster. This will lead to more whipsawing and increased trading costs until the benefit is arbitraged away.

That being said, I don't see how allocating part of your portfolio to GEM (to capture momentum) is much different than using the Larry portfolio to attempt to capture the SCV premium, or buying into an AQR style-premia fund. They all require a leap of faith that there is a style premium to be captured during your investing horizon.
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Yesterdaysnews
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Re: Dual Momentum Investing

Post by Yesterdaysnews »

I think if you keep it within tax-deferred accounts even a whipsaw is not a big deal.
yogiyoda
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Re: Dual Momentum Investing

Post by yogiyoda »

If you are going to go through the trouble of monthly monitoring and potential trouble of trading for a small portion of your portfolio, you may want to define what you are looking for in your test ahead of time. What are you looking for that you haven’t seen in the last six years? If it was working great lately maybe you want to make sure that it continues to work great before moving “all in". But it has been underperforming the default 60/40 portfolio for 6 years by more than it ever has during the backtest. Do you want to make sure it continues to underperform to the same degree? And if the stock market declines about 10% from today’s prices you’ll go to bonds with GEM. Then what? Leave the rest of your portfolio in stock? Wait till a potential bear market is over before you go move the rest of your portfolio out of stock? Or do you get scared and pull all your money out of stocks? If the later, you could have done that with out the trouble of setting a small portion of you portfolio to monitor each month. Just check in on the market each month, wait till the market drops 10%, get scared and pull your money out of stocks. Then hope it wasn’t just a correction.

It would probably be a good idea to have firm idea of what you will do if we run into a steep decline soon. Are you going to batten down the hatches and weather the storm or are you going to trade momentum? The worst position to be in is some wishy-washy in between area. I can't tell you which will do better but I can tell you flip-flopping around won't be good.

Also, there are about 21 trading days per month. I believe there may be more than 21 people or institutions investing with momentum? If I’m not mistaken ETFs trade more often than stocks in today’s market. And don’t forget that the asset classes and lookback period for the book were chosen in hindsight. It’s easy to select good asset classes and look-back lengths in hindsight. The author promoted a different portfolio called Optimal Momentum a few years back with different regions including japan and gold. I believe it must have performed quite poorly because it's been swept under rug. Also, I believe the potential losses for GEM whipsaw can be quite high.
Martin
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Re: Dual Momentum Investing

Post by Martin »

Yogiyoda,
Trust me, there are far more combinations of momentum lookback factors and executions than there are potential investors. I use an average of the top 5 lookback combinations over the last 20-25 years for each portfolio and each combination has six variables. Additionally, do you add the month delay to the lookback, do you have the same combination of funds, do you trigger an exit at the same time, is you decision point the same time etc etc.

Are you using mutal funds and etf, single stocks, going long short or both. Also, if you get right down to it there isn't much difference between momentum and moving average rules which have also been around for years.

As far as working in backtesting vs the future, please tell us what strategy you are using. three fund, stock and bond. Why are those recommended? Based on the past? But will they work in the future? At the end of the day there are always trade offs. For something like the three fund portfolio you hold constant and role the dice. With a momentum strategy you may hold the same funds but at different times. Different risks. Which is better? Who knows, probably both at different times.

Finally, while your arguement of quick progression up and downs causing havoc on momentum strategies is true, take '11 for example; but the upside returns and downside mitigation appears to more than offset a couple of what appears to be isolated scenarios. Only time will tell which approach is "right", but likely it will be both at different times.
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LHerr
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Re: Dual Momentum Investing

Post by LHerr »

"If the 12 months is correct, then in order to stay ahead of the crowd, one would still have to shorten the look back period to get the signals faster. This will lead to more whipsawing and increased trading costs until the benefit is arbitraged away."

Dad2000,

I use commission free ETFs so the trading costs are minimal. As for the 12-month look-back period, it is looking like this time frame is too long. The study is still under investigation.

As you point out, anomalies such as the momentum effect sometimes disappear, attenuate, or even reverse direction. However, one is unlikely to be hurt significantly since ETFs are used to populate the portfolio and a cutoff ETFs helps investors avoid major bear markets.

LHerr
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Maynard F. Speer
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Re: Dual Momentum Investing

Post by Maynard F. Speer »

I ran a simple momentum portfolio for a while .. I think of it more as an absolute return strategy - if you can have 20-25% of your portfolio capturing the majority of the upside in markets, but really limiting downside, then it's a lot like holding hedge funds .. It can improve portfolio efficiency

Ultimately I sold the positions and just bought hedge funds .. If I were in the US I'd probably look at Cambria's GMOM ETF (as that was doing much the same as I was)

I suppose the practicality for me is that waiting >7 years for a bear market is a long time to be monitoring moving averages .. Unless you're running an ETF, I wonder how many people can stay motivated with a strategy like this through market cycles ... My uncertainty with the theory is if you look at the UK's FTSE 100 (quite closely follows the Dow), it throws up too many false signals .. I couldn't get it to backtest anywhere near as well, despite being very similar ... I think if there's a behavioural component, it might be quite unique to certain markets (and just as likely certain time frames)
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes
yogiyoda
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Re: Dual Momentum Investing

Post by yogiyoda »

Yes, there will be times when a trend following model with ETFs will outperform and times when it doesn’t and it may even outperform during the course of the next full market cycle. That's assuming the investor doesn't bail part way through. But I believe the odds for trend following using ETFs under-performing in the next full market cycle are greater than books like DM present and greater than in the past. And whether it's with ETFs or stocks, active trading is a zero sum game. People with lives outside investing may be better served with less labor intensive investment methods where they check their portfolio annually at most (as recommended by Bogle, Buffett etc) and focus the gained time (and brain space) on improving their career skills, spending time with friends and family or just enjoying life.

As an aside, managed futures is an easier option for someone who really wants to diversify part of their portfolio using momentum. Of course that has it's own set of pros and cons and there are only a couple decent funds.
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Maynard F. Speer
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Re: Dual Momentum Investing

Post by Maynard F. Speer »

The reason the 'zero sum (or negative sum) game' argument doesn't dissuade me from strategies like this - in principle - is because we know, time and time again, investors will keep buying at the tops of markets, and hold disproportionately little at the bottoms ..

From retail investors giving up 1%/annually on index funds, to institutions giving away $billions .. (with the median investor doing so poorly, there will be a subset of investors doing disproportionately well)

But an absolute return strategy doesn't need to beat market returns .. If it can exploit market inefficiencies to produce better risk-adjusted returns, then you can either use it in a portfolio to improve efficiency, or you could leverage it up to produce market-beating returns at market-level risk
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes
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LHerr
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Re: Dual Momentum Investing

Post by LHerr »

Does the momentum model really work? That is the underlying question of this Dual Momentum Investing topic. While the anomaly seems to have merit, I think the jury is still out, despite the claims by Gary Antonacci made in his recent book. The only way I know to answer the question is to test the model on my own and that is what I am doing with several portfolios. While my experience is roughly two years old, there are signs the momentum model may give a slight edge over a passively managed portfolio. I am also watching over passive portfolios so I have a good reference as well as several benchmarks. It will take another bear market to truly test the merits of managing portfolios using a momentum model.

There is such a thing as the Schwert Effect. To learn more about this effect, Google the words and then check out some of the references listed on the first Google page. Schwert's research essentially says that anomalies such as the momentum advantage will eventually disappear or at lease degrade in their usefulness. Schwert could be wrong when it comes to momentum as the anomaly seems to be grounded in investor behavior, and that is not likely to change.

LHerr
Martin
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Re: Dual Momentum Investing

Post by Martin »

Maynard F. Speer wrote:I ran a simple momentum portfolio for a while .. I think of it more as an absolute return strategy - if you can have 20-25% of your portfolio capturing the majority of the upside in markets, but really limiting downside, then it's a lot like holding hedge funds .. It can improve portfolio efficiency

Ultimately I sold the positions and just bought hedge funds .. If I were in the US I'd probably look at Cambria's GMOM ETF (as that was doing much the same as I was)

I suppose the practicality for me is that waiting >7 years for a bear market is a long time to be monitoring moving averages .. Unless you're running an ETF, I wonder how many people can stay motivated with a strategy like this through market cycles ... My uncertainty with the theory is if you look at the UK's FTSE 100 (quite closely follows the Dow), it throws up too many false signals .. I couldn't get it to backtest anywhere near as well, despite being very similar ... I think if there's a behavioural component, it might be quite unique to certain markets (and just as likely certain time frames)
FTSE 100 is one of the least robust funds I've tested. Here are the returns for each single and double factor. The charts on the far right will give you the best perspective. With 20/20 hindsight a single 11 month look-back has the highest returns. one note on the charts, the bottom chart uses a 2:1 weighting with the double factor in the horizontal.

This was a 30 year run. I used 3% as the fixed return and switched to fixed when below -2%. for comparison the FTSE 100 without momentum returned 5.7% with a SD of 16.1. Using my favorite combo of about 11 and 4 months I would have been 5.3% with a SD 12.4. Lower on the return but better on the SD. (Interestingly there is .2% Alpha vs the S&P)

https://docs.google.com/spreadsheets/d/ ... sp=sharing
cottonseed1
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Re: Dual Momentum Investing

Post by cottonseed1 »

Here is an old article by Larry Swedroe on market timing.

posting.php?f=10&mode=reply&t=158297

The evidence has shown that market timing doesn't yield superior results. With that in mind, here are some quotes on market timing from some of the most astute minds in the industry.

Warren Buffett
"Our stay-put behavior reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient.­"
"We continue to make more money when snoring than when active."
"The only value of stock forecasters is to make fortune-tellers look good."
"My favorite time frame is forever."
Peter Lynch
"Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves."­
"I can't recall ever once having seen the name of a market timer on Forbes' annual list of the richest people in the world. If it were truly possible to predict corrections, you'd think somebody would have made billions by doing it."
Jason Zweig
"Whenever some analyst seems to know what he's talking about, remember that pigs will fly before he'll ever release a full list of his past forecasts, including the bloopers."
Charles Ellis
"'Market timing' is unappealing to long-term investors. As in hunting deer or fishing for rainbow trout, investors have learned the importance of 'being there' and using patient persistence -- so they are there when opportunity knocks."
Jonathan Clements
"What to do when the market goes down? Read the opinions of the investment gurus who are quoted in the WSJ. And, as you read, laugh. We all know that the pundits can't predict short-term market movements. Yet there they are, desperately trying to sound intelligent when they really haven't got a clue."
Alan Abelson
"Do you know what investing for the long run but listening to market news everyday is like? It's like a man walking up a big hill with a yo-yo and keeping his eyes fixed on the yo-yo instead of the hill."
Bernard Baruch
"Only liars manage to always be out during bad times and in during good times."
Mark Rieppe
"Market timing is impossible to perfect."
David L. Babson & Company
"It must be apparent to intelligent investors that if anyone possessed the ability to do so [forecast the immediate trend of stock prices] consistently and accurately he would become a billionaire so quickly he would not find it necessary to sell his stock market guesses to the general public."
Financial Publications
"Let's say it clearly: No one knows where the market is going-experts or novices, soothsayers or astrologers. That's the simple truth." -- Fortune
LittleD
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Re: Dual Momentum Investing

Post by LittleD »

Lots of comments here but the real meat of the article is that this is not really a trading approach but an investment approach
with downside volatility protection. As I said before, this strategy has the potential to mitigate some downside risk but will
not likely beat buy & hold in a long term bull market. In a crash or severe downturn, I see this 10-12 month moving average trend
strategy getting you out of the market before major damage. You will likely get back in after the market has gone up pretty well
when the markets return. Whipsaws are to be expected and are just part of the insurance of not suffering a 20-50% decline. I see
this strategy only trading 2-3 times every 5 years or so... Not to much but worth the effort.
cottonseed1
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Re: Dual Momentum Investing

Post by cottonseed1 »

LittleD wrote:Lots of comments here but the real meat of the article is that this is not really a trading approach but an investment approach
with downside volatility protection. As I said before, this strategy has the potential to mitigate some downside risk but will
not likely beat buy & hold in a long term bull market. In a crash or severe downturn, I see this 10-12 month moving average trend
strategy getting you out of the market before major damage. You will likely get back in after the market has gone up pretty well
when the markets return. Whipsaws are to be expected and are just part of the insurance of not suffering a 20-50% decline. I see
this strategy only trading 2-3 times every 5 years or so... Not to much but worth the effort.
Why not simply increase your bond (US Treasury) allocation if you are concerned about volatility and want to mitigate downside risk? Seems like a higher bond allocation would involve less frictional/trading cost than DM, fewer opportunities for capitulation or other implementation/behavioral mistakes, and a higher probability of actually achieving the stated goal of lower volatility and downside protection.

Sure it is possible that this strategy continues to out perform a balanced portfolio over the next 20-30 years AND the average investor is able to implement it successfully, but is the combined probability really that likely? Unless we are living in Lake Wobegon, that seems like quite the parlay.

This brings to mind another Buffett quote, "I would rather be certain of a good result than hopeful of a great one.”
LittleD
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Re: Dual Momentum Investing

Post by LittleD »

cottonseed1 wrote:
LittleD wrote:Lots of comments here but the real meat of the article is that this is not really a trading approach but an investment approach
with downside volatility protection. As I said before, this strategy has the potential to mitigate some downside risk but will
not likely beat buy & hold in a long term bull market. In a crash or severe downturn, I see this 10-12 month moving average trend
strategy getting you out of the market before major damage. You will likely get back in after the market has gone up pretty well
when the markets return. Whipsaws are to be expected and are just part of the insurance of not suffering a 20-50% decline. I see
this strategy only trading 2-3 times every 5 years or so... Not to much but worth the effort.
Why not simply increase your bond (US Treasury) allocation if you are concerned about volatility and want to mitigate downside risk? Seems like a higher bond allocation would involve less frictional/trading cost than DM, fewer opportunities for capitulation or other implementation/behavioral mistakes, and a higher probability of actually achieving the stated goal of lower volatility and downside protection.

Sure it is possible that this strategy continues to out perform a balanced portfolio over the next 20-30 years AND the average investor is able to implement it successfully, but is the combined probability really that likely? Unless we are living in Lake Wobegon, that seems like quite the parlay.

This brings to mind another Buffett quote, "I would rather be certain of a good result than hopeful of a great one.”

If you feel more comfortable & confident with this strategy, no worries. I just see Bond prices coming off 20 year highs with ultra low yields and think I would rather be more on the stock side even though they are on the expensive side too. I would rather let the market price take me out right now if that happens and just think...I only need to look at 1 time a month for 10 seconds to tell if I need to do something. There are...as they say... many roads to Dublin so good luck with your investments!

Check here once a month to see if a decision is necessary and them use 12-month momentum to select the ETF's with largest growth
to invest in. Works pretty well!

http://mebfaber.com/timing-model/
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LHerr
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Re: Dual Momentum Investing

Post by LHerr »

[OT link removed by admin LadyGeek]
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LHerr
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Re: Dual Momentum Investing

Post by LHerr »

Let me try this.

Applying a Dual Momentum model with the IVY or Faber 10 from 6/30/2006 through 6/11/2015 showed positive results. These are averages from a Monte Carlo analysis.

Dual Momentum return is 240% vs. 77% for the VTTVX benchmark. This is a stock and bond fund.
Max. DD for the Dual Momentum portfolio is 26.5% vs. 45.3% for the benchmark.

The DM portfolio was reviewed every 33 days and investments were confined to the top two performing ETFs based on a ranking system I can explain if anyone is interested. ETFs were sold if they ranked below SHY.

One negative of any trading system is the impact of taxes. It is better to use DM with tax deferred accounts.

LHerr
paullees
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Re: Dual Momentum Investing

Post by paullees »

LHerr wrote:Let me try this.

Applying a Dual Momentum model with the IVY or Faber 10 from 6/30/2006 through 6/11/2015 showed positive results. These are averages from a Monte Carlo analysis.

Dual Momentum return is 240% vs. 77% for the VTTVX benchmark. This is a stock and bond fund.
Max. DD for the Dual Momentum portfolio is 26.5% vs. 45.3% for the benchmark.

The DM portfolio was reviewed every 33 days and investments were confined to the top two performing ETFs based on a ranking system I can explain if anyone is interested. ETFs were sold if they ranked below SHY.

One negative of any trading system is the impact of taxes. It is better to use DM with tax deferred accounts.

LHerr
Would be interested to hear about the ranking system and which ETF's you were using.
RosieQ
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Re: Dual Momentum Investing

Post by RosieQ »

I have been following this strategy with great interest, and the backtesting results do look really good. After the stockmarket drawdown of the last week it looks like for most funds being tracked either total market or the S&P 500 has now dropped below the treasury yield with a 12 month lookback period advocated by this GEM strategy. That would indicate a time to sell all stocks and move to an intermediate term bond fund according to this strategy. Any thoughts on whether those who have been following this intend to actually implement? It's one thing to just read about something but another beast entirely for a buy and hold investor to sell in a down/downward trending market.
Tristan
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Re: Dual Momentum Investing

Post by Tristan »

RosieQ, backtesting tells you what happened in the past. It doesn't tell you what will happen in the future. The GEM protocol uses large cap funds (eg. VV) and the t-bill rate to compare the look back period to. Using a 12 month look back period large caps have not yet dropped below the t-bill rate, but they are getting close.
Martin
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Re: Dual Momentum Investing

Post by Martin »

RosieQ wrote:I have been following this strategy with great interest, and the backtesting results do look really good. After the stockmarket drawdown of the last week it looks like for most funds being tracked either total market or the S&P 500 has now dropped below the treasury yield with a 12 month lookback period advocated by this GEM strategy. That would indicate a time to sell all stocks and move to an intermediate term bond fund according to this strategy. Any thoughts on whether those who have been following this intend to actually implement? It's one thing to just read about something but another beast entirely for a buy and hold investor to sell in a down/downward trending market.
I was 100% in equity and it was working out great. Mid Cap Growth was one if not the highest performing classes and Health Care was by far the best performing sector over the last few months. So the relative part of the dual momentum worked as planned. I went off script and bailed early with 50% of the mid cap pretty much at the high point in late July when absolute momentum brushed the sell point but didn't cross. (I was watching decaying momentum values for the last couple of months.). Thursday the mid caps dropped below the sell point so I completely exited equities with the exception of Health Care which is still holding on. (this is staying on script.)

So net, after a few months I have lived through my first major transition. I am in cash right now as Total Bond is the only Bond product that I have access to in 401k and it is still ranked lower than a 2% fixed fund that I use as Cash. I will wait to see how everything plays out over the next few months. If this is a small correction then it will likely net out about even. If it goes down from here then it could play to my favor. My crystal ball is broken so I will wait here like everyone else.

finally, this is not buy and hold investing. while long term I expect my AA to match a typical 60/40 mix, it gets there by rotation. you are either a buy and hold or Momentum but I don't believe you can be both. (Although, you could use momentum to have a dynamic AA instead of a more all or nothing approach.)
RosieQ
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Re: Dual Momentum Investing

Post by RosieQ »

Martin wrote:
I was 100% in equity and it was working out great. Mid Cap Growth was one if not the highest performing classes and Health Care was by far the best performing sector over the last few months. So the relative part of the dual momentum worked as planned. I went off script and bailed early with 50% of the mid cap pretty much at the high point in late July when absolute momentum brushed the sell point but didn't cross. (I was watching decaying momentum values for the last couple of months.). Thursday the mid caps dropped below the sell point so I completely exited equities with the exception of Health Care which is still holding on. (this is staying on script.)

So net, after a few months I have lived through my first major transition. I am in cash right now as Total Bond is the only Bond product that I have access to in 401k and it is still ranked lower than a 2% fixed fund that I use as Cash. I will wait to see how everything plays out over the next few months. If this is a small correction then it will likely net out about even. If it goes down from here then it could play to my favor. My crystal ball is broken so I will wait here like everyone else.

finally, this is not buy and hold investing. while long term I expect my AA to match a typical 60/40 mix, it gets there by rotation. you are either a buy and hold or Momentum but I don't believe you can be both. (Although, you could use momentum to have a dynamic AA instead of a more all or nothing approach.)
Very good thoughts. If I recall the end result of the momentum strategy was about 30% of the time being in bonds. So looking at it like a 70/30 strategy with a twist is an interesting perspective. I'm still early career and do see a lot to believe in with this strategy so I've moved my holdings into more conservative investments as well- 75% into my employer' savings fund which is returning about 1.5% right now, and 25% into an intermediate term bond fund which is just a little higher. Time will tell where this goes though I don't see China re-arranging their economy quickly anytime soon.
freyj6
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Re: Dual Momentum Investing

Post by freyj6 »

As I understand it holding are only adjusted at the end of each month, so if the S&P drops below the T-bill rate mid month, holdings aren't adjusted until month end correct?
Martin
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Re: Dual Momentum Investing

Post by Martin »

freyj6 wrote:As I understand it holding are only adjusted at the end of each month, so if the S&P drops below the T-bill rate mid month, holdings aren't adjusted until month end correct?
It really depends on your rule set. I extensively modeled both daily and monthly adjustments with all sorts of minimum holds. in the end they all get to about the same place. Even with the more frequent evaluations there still isn't a bunch of trades. I also modeled a minimums of hold periods ranging from 5 to 60 days. If I remembered correctly the optimal back tested (aka curve fitting) occurred with a 1 month mimimum hold. Antonacci's book has a monthly evaluation and adjustment.
Tristan
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Re: Dual Momentum Investing

Post by Tristan »

Martin, you can have some of you portfolio in a dual momentum strategy and the rest buy and hold. The main risk of buy and hold is a big drawdown, and the main risk of dual momentum is a whipsaw market. You could diversify those risks by holding some of your portfolio (preferably a tax protected account) in dual momentum and the rest buy and hold.

GEM protocol has you doing your look back once a month on the same day of the month, but not necessarily the end of the month.
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RunningRad
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Re: Dual Momentum Investing

Post by RunningRad »

RosieQ wrote:I have been following this strategy with great interest, and the backtesting results do look really good. After the stockmarket drawdown of the last week it looks like for most funds being tracked either total market or the S&P 500 has now dropped below the treasury yield with a 12 month lookback period advocated by this GEM strategy. That would indicate a time to sell all stocks and move to an intermediate term bond fund according to this strategy. Any thoughts on whether those who have been following this intend to actually implement? It's one thing to just read about something but another beast entirely for a buy and hold investor to sell in a down/downward trending market.
In the portions of my portfolio that I have dedicated to the dual momentum strategy, I will be checking the signal at the close of Aug 31 for the indication of what to do next (if anything). If the market closes the way it did today, it sell be a SELL on the SPY (or equivalent) and a BUY on the AGG (or equivalent). The SPY will need to advance a little more than 3% to avoid the sell signal.
Few decisions in life motivated by greed ever have happy outcomes--Peter Bernstein, The 60/40 Solution
freyj6
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Re: Dual Momentum Investing

Post by freyj6 »

I have a portion of my portfolio dedicated as well. The strategy as a whole seems sound, but when the market is bouncing around really close to the t-bill rate it's a little bit nerve racking. Maybe you readjust your holdings and lock in a 10% loss, or maybe you're slightly above and lose another 15% over the next month. It's just crazy how the day you rebalance changes things so dramatically.

@Martin - Have you (or anyone else) experimented how luck with day of the month influences long term returns? It would be interesting to see how long term returns of GEM would vary based on what day you got in/out. If your date lined up very badly with a correction, you might have a 10% lower year than you would have if your rebalance date was a week later.

Perhaps the best reasonable way to know the resilience of the strategy would be if the returns are pretty consistent over 30 different possible rebalancing days.
LittleD
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Re: Dual Momentum Investing

Post by LittleD »

freyj6 wrote:I have a portion of my portfolio dedicated as well. The strategy as a whole seems sound, but when the market is bouncing around really close to the t-bill rate it's a little bit nerve racking. Maybe you readjust your holdings and lock in a 10% loss, or maybe you're slightly above and lose another 15% over the next month. It's just crazy how the day you rebalance changes things so dramatically.

@Martin - Have you (or anyone else) experimented how luck with day of the month influences long term returns? It would be interesting to see how long term returns of GEM would vary based on what day you got in/out. If your date lined up very badly with a correction, you might have a 10% lower year than you would have if your rebalance date was a week later.

Perhaps the best reasonable way to know the resilience of the strategy would be if the returns are pretty consistent over 30 different possible rebalancing days.

If you do a very long term lookback at the SP500, the 28th of the month to the 6th of the following month are usually very good days to
be in stocks. September & early October are the most negative months to be in the markets over a very long lookback at the markets. I think studies have shown that if you do your monthly evaluation using DM on around the 7th of the month and act on the close, you might achieve some small gain over long periods of time. That could and might change in future years if enough large players in the markets arbitrage that history away. I would just pick a day early in the month. Do your evaluation and make the trades if necessary without thinking about it too much. Develop a set of rules and stick to them no matter what comes or what you feel or think. Mechanical evaluation works out while subjective feelings will lose you money in the long run.
freyj6
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Re: Dual Momentum Investing

Post by freyj6 »

^Yeah I'm not asking what day of the month to readjust.

What I'm asking whether missing a flight to bonds by a day (and getting another month of negative returns) or fleeing to bonds prematurely (when your rebalance date lands exactly at the bottom of a small correction) can dramatically effect total returns over the long term.

We know what the past returns have been given a certain rebalancing date. How would those returns have been if you hit a few of the bad days to readjust your holdings?
LittleD
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Re: Dual Momentum Investing

Post by LittleD »

freyj6 wrote:^Yeah I'm not asking what day of the month to readjust.

What I'm asking whether missing a flight to bonds by a day (and getting another month of negative returns) or fleeing to bonds prematurely (when your rebalance date lands exactly at the bottom of a small correction) can dramatically effect total returns over the long term.

We know what the past returns have been given a certain rebalancing date. How would those returns have been if you hit a few of the bad days to readjust your holdings?

The future is almost always (actually always) unknowable so do what your investment statement
rules say and just go with it. You will time some perfect and miss others by a mile. Over a long
period of investment time, it won't amount to much.
freyj6
Posts: 554
Joined: Thu Jun 19, 2014 2:09 am

Re: Dual Momentum Investing

Post by freyj6 »

Maybe I'm not being clear. This has nothing to do with market timing or optimizing based on past results (!!!!).

What I'm wondering is whether Gary's model is similarly successful over the long term if you get unlucky with your rebalancing dates (again, yes, it's random/unknowable going forward. Got it. I'm just curious about the consistency of the backtest).
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