Larry Swedroe: Why Financial Trends Persist

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Random Walker
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Larry Swedroe: Why Financial Trends Persist

Post by Random Walker » Wed Mar 21, 2018 9:11 am

http://www.etf.com/sections/index-inves ... nopaging=1

I find time series momentum fascinating. No matter what innovations come to the markets that further increase efficiency, this behavioral anomaly persists. The data supporting trend following is too substantive to just blow off. TS Momentum is especially worthy of consideration for its potential positive portfolio effect in an extended equity bear market. The referenced paper from AQR with it's smile curve is a very good read too.

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Re: Larry Swedroe: Why Financial Trends Persist

Post by cfs » Wed Mar 21, 2018 4:18 pm

Random Walker wrote:
Wed Mar 21, 2018 9:11 am
. . . The data supporting trend following is too substantive to just blow off . . .
Thank you Mister Dave for the link to Mister Swedroe's articles. It should be noted that Mister Swedroe is no longer active in this forum (our loss). Good luck, y gracias por leer ~cfs~
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Re: Larry Swedroe: Why Financial Trends Persist

Post by golfCaddy » Wed Mar 21, 2018 5:21 pm

There's a lot of issues with the behavioral theory that's being ignored. First, why is the auto-correlation between monthly returns this odd parabola(from 1 to 11 months), with a maximum at 1-month and 11-months, and nearly zero at 7 months? Then, why is there this sharp reversal, at 13-months and 15-months being significant, but strongly negative, while 14-months appears to be near zero? There's no intuitive or satisfying behavioral theory as to why the chart should like this. If this was just a case of investors being unduly influenced by recent performance, you might expect a monotonically decreasing curve, until you reached zero at which point it should stabilize.

Image

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Re: Larry Swedroe: Why Financial Trends Persist

Post by nisiprius » Wed Mar 21, 2018 5:33 pm

Larry Swedroe's spends much of the article discussing two papers by Mebane Faber on trend-following and timing strategies. Since Faber's second article say that his strategy has performed well from 2006 through 2016, it is relevant to see the results were when Faber applied them to an ETF, GTAA, which he managed--using trend-following and timing strategies--from 2010 through 2014.

The ETF was announced in 2010. I'm linking to an archived copy of the announcement from the Wayback Machine, as it has been removed from the current website: Cambria Global Tactical ETF (NYSE:GTAA)
September 29th, 2010 by Mebane Faber

....The NYSE launch date is projected for mid-October with the ticker symbol GTAA. Some of the more interesting features are below....
Global Diversification...

Trend Following The GTAA strategy attempts to be invested in asset classes that are appreciating and out of asset classes that are declining.

Risk Management The GTAA strategy attempts to control risk by using multiple timing algorithms across various timeframes in an attempt to lower volatility and drawdowns. Asset classes can be over/underweighted based on other momentum, mean reversion, and fundamental factors....

Shareholder Friendly....

Conflicts of Interest -The portfolio manager will have a significant amount of their net worth invested in the Fund. (In my case it will be 90%+.)
Faber managed the ETF through 7/27/2014, and it was then taken over by Morgan Creek. The fund closed on 5/12/17.

Here is how it performed. I've drawn arrows to indicate Faber's tenure.

Image

I do not know why Faber seemingly was unable to apply his trend following and timing algorithms successfully, in a real-world context, over a time period when his paper said these strategies had worked well.

Another archived web page notes that
GTAA will invest in ETFs representing all of the global asset classes including U.S. equities, foreign equities, U.S. bonds, foreign bonds, U.S real estate, foreign real estate, currencies, and commodities.
It is hard to know what to compare it to, but for comparison the Vanguard Lifestrategy Conservative Growth fund would be 40% stocks, 60% bonds, with both US and international allocations in stocks and bonds. In order to make as fair a comparison as possible, since the etf.com chart is a price chart and Morningstar, alas, does not present data on dead funds, I will show a price chart for the Vanguard fund--i.e. ignoring dividends.

Image

Thus, over a time period when the trend-following ETF experienced price appreciation from $24.95 to $26.01 or a total (over the whole time period) of 4.24%, the Vanguard fund, using only basic asset classes in simple cap-weighted index funds and rebalancing to a steady allocation without trend following, experienced price appreciation of 16.17%.

If someone knows a better comparison target than Vanguard Lifestrategy Conservative Growth, please suggest it. Faber's GAA ETF, which also uses a grand global asset allocation, but I don't think makes use timing or trend following, would be ideal but unfortunately it was not created until after the end of his tenure managing GTAA.
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Re: Larry Swedroe: Why Financial Trends Persist

Post by lack_ey » Wed Mar 21, 2018 6:32 pm

nisiprius wrote:
Wed Mar 21, 2018 5:33 pm
Larry Swedroe's spends much of the article discussing two papers by Mebane Faber on trend-following and timing strategies. Since Faber's second article say that his strategy has performed well from 2006 through 2016, it is relevant to see the results were when Faber applied them to an ETF, GTAA, which he managed--using trend-following and timing strategies--from 2010 through 2014.
Isn't this more or less covered by the article and the underlying paper already?

From the article:
In reviewing his findings, Faber noted: “Though the timing system outperformed by a significant amount during the 2008–2009 bear market, it went on to underperform stocks six of the next eight years. Many investors who had implemented the timing model after the crash likely struggled with staying the course with a tactical approach.”
I guess a more granular look never hurts, though single-digit-year evaluation windows are always going to be suspect to a degree.

And if we generalize, hopefully for very clear reasons to everybody, any market timing scheme—using a nonsensical signal, trend following, or anything else—will more likely than not underperform buy-and-hold during a bull market, unless it somehow lucks into significant alpha (or it is that good). Having lower average beta exposure is not going to help there. Likewise, it's likely to outperform in a bear market for the same reason. You probably want to look over longer periods of time and/or scale the exposures to do a comparison that makes more sense.


Additionally, I don't remember that well and don't care to search around to figure out how closely the GTAA strategy matched the simple moving averages outlined in Meb Faber's paper, but maybe there was some difference there over that period as well. I mean, I think it's likely a decent representation of a timing-related strategy that Meb Faber thinks makes sense, but it might not correspond perfectly with the actual topic of discussion.

IIRC it owned other ETFs across multiple different assets, including things like bonds, commodities, currencies, and did not short anything.

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Re: Larry Swedroe: Why Financial Trends Persist

Post by Taylor Larimore » Wed Mar 21, 2018 7:50 pm

Random Walker wrote:
Wed Mar 21, 2018 9:11 am
http://www.etf.com/sections/index-inves ... nopaging=1

I find time series momentum fascinating. No matter what innovations come to the markets that further increase efficiency, this behavioral anomaly persists. The data supporting trend following is too substantive to just blow off. TS Momentum is especially worthy of consideration for its potential positive portfolio effect in an extended equity bear market. The referenced paper from AQR with it's smile curve is a very good read too.

Dave
Dave:

Many years ago I became fascinated with a mutual fund called "FUNDX Upgrader Fund" which was outperforming most other funds. The "FundX Investment Group" describes their trend-following momentum funds this way:
We buy highly ranked funds and ETFs and sell these funds when they fall in our ranks. By continually following this active process of buying leaders and selling laggards, the Upgrading strategy seeks to align the FundX Upgrader Funds portfolios with current market leadership and change the Fund portfolios as market leadership changes.
Unfortunately, the flagship FUNDX momentum fund has not done well compared with Vanguard Total Stock Market Index Fund (VTSMX). Below are Morningstar 10- and 15-year returns on 2/28/2018:

Fund-------10-years-----15-years
FUNDX------5.43%---------9.47%
VTSMX------9.77%--------10.72%

Past performance does not forecast future performance.

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Larry Swedroe: Why Financial Trends Persist

Post by marcopolo » Wed Mar 21, 2018 9:03 pm

lack_ey wrote:
Wed Mar 21, 2018 6:32 pm


And if we generalize, hopefully for very clear reasons to everybody, any market timing scheme—using a nonsensical signal, trend following, or anything else—will more likely than not underperform buy-and-hold during a bull market, unless it somehow lucks into significant alpha (or it is that good). Having lower average beta exposure is not going to help there. Likewise, it's likely to outperform in a bear market for the same reason. You probably want to look over longer periods of time and/or scale the exposures to do a comparison that makes more sense.

nisiprius, thanks for the analysis of the theory put into action!

lack_ey,
Isn't this the common refrain we hear about expensive active management in general "we know we under perform, but we will protect you on the downside." History has repeatedly shown that to not be the case.

The years between 2010 and 2014 discussed above, while having overall good performance did have 2 periods (in 2011 and 2013) of pretty good size draw downs. Looking at the plots, it is not at all clear to me that the GTAA fund provided much downside protection during that time relative to the LifeStrategy fund.

Even if there is some modest protection on the downside, if the strategy under performs so woefully during the much more prevalent upswings, what is an investor to do? Do we try to predict when we are in an upswing vs downswing and and jump in an out of this strategy? I, for one, have never been very good at identifying such inflection points. If i were, there are better strategies to exploit that, right?
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Re: Larry Swedroe: Why Financial Trends Persist

Post by lack_ey » Thu Mar 22, 2018 2:33 am

marcopolo wrote:
Wed Mar 21, 2018 9:03 pm
lack_ey wrote:
Wed Mar 21, 2018 6:32 pm


And if we generalize, hopefully for very clear reasons to everybody, any market timing scheme—using a nonsensical signal, trend following, or anything else—will more likely than not underperform buy-and-hold during a bull market, unless it somehow lucks into significant alpha (or it is that good). Having lower average beta exposure is not going to help there. Likewise, it's likely to outperform in a bear market for the same reason. You probably want to look over longer periods of time and/or scale the exposures to do a comparison that makes more sense.

nisiprius, thanks for the analysis of the theory put into action!

lack_ey,
Isn't this the common refrain we hear about expensive active management in general "we know we under perform, but we will protect you on the downside." History has repeatedly shown that to not be the case.

The years between 2010 and 2014 discussed above, while having overall good performance did have 2 periods (in 2011 and 2013) of pretty good size draw downs. Looking at the plots, it is not at all clear to me that the GTAA fund provided much downside protection during that time relative to the LifeStrategy fund.

Even if there is some modest protection on the downside, if the strategy under performs so woefully during the much more prevalent upswings, what is an investor to do? Do we try to predict when we are in an upswing vs downswing and and jump in an out of this strategy? I, for one, have never been very good at identifying such inflection points. If i were, there are better strategies to exploit that, right?
There's three different things:
1) claim of active managers protecting downside (as a group this is largely BS)
2) whatever GTAA specifically did, notably including investing in assets not in the Vanguard asset allocation fund
3) my point about in/out market timing strategies as was discussed in the actual paper and article

I'm not defending 1) and am not sure about 2) specifically. I'm just saying that if you're invested in cash sometimes instead of stocks (or any asset X), you should see less volatility than being 100% in X all the time, buy and hold. It's taking less market risk. This in of itself is not useful or notable.

There may be, and seems to be, some additional effect of trend following reducing drawdowns generally above the level expected from the lower passive exposure on average (that is, lower drawdowns than hypothetically being out of the market the same percentage of the time randomly). This should be the more controversial part but is empirically supported and follows from some studies of market behavior as well as the fact that bear markets tend to be more volatile than bull markets, and volatility over a period is significantly correlated with volatility in the next period. As such, if you sell when things trend downwards, that's more likely when things are more volatile, and will more likely than not continue to be volatile, for better or worse. A lot of the times this would make you miss out on recoveries; sometimes it will avoid extended or significant parts of bear markets.

You may be reading too much into a short evaluation window to analyze effects that are not large. It's going to be lost in the noise. For the purposes of these kinds of discussions, something "works" if it is better let's say 55% of the time (with equal effect size on upside and downside. Nobody's talking about anything close to 100%. And with trend following relative to the market, even if it does work, it's probably not going to be anything like 55%—even supposing it can deliver superior risk-adjusted returns, it's going to be losing a lot of the time, with some bursts of superior performance to make up for it, like cutting out some portion of the 2008-2009 losses. It's definitely not something easy to stick with.

Keep in mind that when Meb Faber or Larry Swedroe or most people in this context talk about potential benefits, they mean on sticking with the strategy long term, not trying to market time the market-timing strategy. That includes living with the many periods where you'd do worse. And the benefit from a in/out market timing strategy would be in risk-adjusted return (higher Sharpe ratio or similar). This doesn't mean higher returns than 100% invested buy-and-hold.

If you're skeptical about trends persisting, you'd not be the only one, but that's a different line of attack than what you're suggesting here, I think.

All this is clearly pre-tax, or in tax-advantaged accounts, of course.

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Re: Larry Swedroe: Why Financial Trends Persist

Post by fennewaldaj » Thu Mar 22, 2018 2:55 am

My though with the trend following strategies in general that work in back testing is what if we enter a period where draw downs begin happening much faster than they did in the past. If these types of strategies manage to not get out before a say a 40% draw down while also under performing in bull markets its kind of a disaster. We just had a period of rapid decline basically immediately after a peak. While it was only a ~10% draw down I see no reason to think that if can't happen with a larger draw down in the future.

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Re: Larry Swedroe: Why Financial Trends Persist

Post by marcopolo » Thu Mar 22, 2018 7:57 am

lack_ey wrote:
Thu Mar 22, 2018 2:33 am

If you're skeptical about trends persisting, you'd not be the only one, but that's a different line of attack than what you're suggesting here, I think.
Thanks for the thoughtful response.

I am not necessarily skeptical about trends persisting. I am skeptical about our ability to exploit them. I think trends probably exist until they don't. Our ability to predict when they will and when they will not is more challenging. Everyone can point to them after the fact and say, "see strategy X" would have worked. But, who is identifying them ahead of time. I know there is a lot of academic work supporting this, and the idea has been around a long time, so where are the retail investment vehicles exploiting this idea that has a long track record of doing what is claimed. To my knowledge, they simply do not exist, why is that?
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Re: Larry Swedroe: Why Financial Trends Persist

Post by Random Walker » Thu Mar 22, 2018 9:36 am

Accessing TS Momentum has nothing to do with predicting: it’s a formulaic, agnostic, passive strategy in that sense.

The strategy appears robust to different time period definitions: in fact I believe AQR uses three different time periods in its fund construction

Strategy should be more efficient diversifying across different asset classes

I think it’s significant what role the investor chooses for TS Mom to play in the portfolio. I took a small amount from bonds to create the TS Mom position in my portfolio. This increases risk, increases expected return, but should increase Sharpe ratio as well. Also, I’m looking for some possible good behavior in an extended equity bear.

From AQR website: QMHRX Managed Futures Strategy HV

1 year -8.05%
3 year -7.37%
Since inception 7/16/13 0.96%

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Re: Larry Swedroe: Why Financial Trends Persist

Post by willthrill81 » Thu Mar 22, 2018 9:46 am

The fact that a widely respected Boglehead like Swedroe, who has historically been greatly opposed to market timing, has come around to trend following (after it has underperformed buy-and-hold for nearly a decade) should be very telling about the historic value of this strategy.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Larry Swedroe: Why Financial Trends Persist

Post by marcopolo » Thu Mar 22, 2018 10:59 am

willthrill81 wrote:
Thu Mar 22, 2018 9:46 am
The fact that a widely respected Boglehead like Swedroe, who has historically been greatly opposed to market timing, has come around to trend following (after it has underperformed buy-and-hold for nearly a decade) should be very telling about the historic value of this strategy.
So, where are all the great retail investment vehicles that have used these strategies and delivered on the theoretical advantages?
I am willing to be educated, but if it is so obviously advantageous, why aren't there a myriad of products exploiting the strategy? I believe the well-respected founders of LTCM also had very good theoretical underpinnings of their strategy, as have a long list other strategies that look great in retrospect, but fail to deliver when implemented.

There is a parallel thread going on that i believe explains some of why this is the case, p-hacking and harking. I do not think most researchers are doing this intentionally, but there is only a very limited data set to work with, and with so many people looking for slightly better strategies, that data set has been p-hacked to death. p-hacking is not limited to a single researcher using bad methodologies, the pitfall exists when multiple groups hack the same data set.

I know the retort will be that the paper discussed in the subject article does do out-of-band testing, but that is also on a limited existing data set.

If we have two data sets A and B. A single researcher studies data set A and comes up with a theory X and then tests it on data set B and the results hold up, that is great. And a lot of papers state that this is what they have done. What they don't tell you is what the sequence of events leading up to that might have been. So, it looks more like this:

1) Study A, come up with theory X, test X on B, it fails. I guess we cant publish that.
2) Study A, come up with theory Y, test Y on B, it fails. I guess we cant publish that.
...

N) Study A, come up with theory YXXY, test YXXY on B, it holds up! Awesome, start the presses!

A poor researcher might do all of those steps themselves, i suspect that is not the norm. But, in aggregate, across so many people looking for an edge, this is effectively what is happening. The significance of the succeeding theory is pretty diminished, and it is not surprising it then fails to live up to its promises when implemented.
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Re: Larry Swedroe: Why Financial Trends Persist

Post by marcopolo » Thu Mar 22, 2018 11:02 am

Random Walker wrote:
Thu Mar 22, 2018 9:36 am
Accessing TS Momentum has nothing to do with predicting: it’s a formulaic, agnostic, passive strategy in that sense.

The strategy appears robust to different time period definitions: in fact I believe AQR uses three different time periods in its fund construction

Strategy should be more efficient diversifying across different asset classes

I think it’s significant what role the investor chooses for TS Mom to play in the portfolio. I took a small amount from bonds to create the TS Mom position in my portfolio. This increases risk, increases expected return, but should increase Sharpe ratio as well. Also, I’m looking for some possible good behavior in an extended equity bear.

From AQR website: QMHRX Managed Futures Strategy HV

1 year -8.05%
3 year -7.37%
Since inception 7/16/13 0.96%

Dave
I am not sure what we are supposed to make of those results, is that good or bad, what are we comparing it to?
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Larry Swedroe: Why Financial Trends Persist

Post by willthrill81 » Thu Mar 22, 2018 11:07 am

marcopolo wrote:
Thu Mar 22, 2018 10:59 am
willthrill81 wrote:
Thu Mar 22, 2018 9:46 am
The fact that a widely respected Boglehead like Swedroe, who has historically been greatly opposed to market timing, has come around to trend following (after it has underperformed buy-and-hold for nearly a decade) should be very telling about the historic value of this strategy.
So, where are all the great retail investment vehicles that have used these strategies and delivered on the theoretical advantages?
I am willing to be educated, but if it is so obviously advantageous, why aren't there a myriad of products exploiting the strategy?
Because most investors aren't willing to lag behind the market for years on end. Buy-and-hold has trounced every 'mainstream' trend following strategy for the last nine years.

David Stein from the Money for the Rest of Us podcast recounts his experience dealing with college endowments and other investment groups. When he asked them how long they would stick with a manager who was underperforming the market, they said one or two years.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Larry Swedroe: Why Financial Trends Persist

Post by marcopolo » Thu Mar 22, 2018 11:28 am

willthrill81 wrote:
Thu Mar 22, 2018 11:07 am
marcopolo wrote:
Thu Mar 22, 2018 10:59 am
willthrill81 wrote:
Thu Mar 22, 2018 9:46 am
The fact that a widely respected Boglehead like Swedroe, who has historically been greatly opposed to market timing, has come around to trend following (after it has underperformed buy-and-hold for nearly a decade) should be very telling about the historic value of this strategy.
So, where are all the great retail investment vehicles that have used these strategies and delivered on the theoretical advantages?
I am willing to be educated, but if it is so obviously advantageous, why aren't there a myriad of products exploiting the strategy?
Because most investors aren't willing to lag behind the market for years on end. Buy-and-hold has trounced every 'mainstream' trend following strategy for the last nine years.

David Stein from the Money for the Rest of Us podcast recounts his experience dealing with college endowments and other investment groups. When he asked them how long they would stick with a manager who was underperforming the market, they said one or two years.
That would be an explanation if there were NO trend following products at all (no market interest), but i am not sure that would explain why the ones that do exist have not delivered as promised . Trend following concept has been around much longer than the last ten years. Was there a retail product that performed as advertised back then? There should have been some that did great during 2000-2002, and 2007-2009. Wouldn't they have been shouting from the roof tops about how great they held up? You would think some of them would have attracted a following. Maybe they exist, and i am just not aware of them.

Also, how much will they outperform when the market does inevitably turn negative? Will it make up for the decade of severe under performance?
Is the recommendation to live with the under performance in hopes of down side protection, or is the investor supposed to jump in and out of this strategy. If so, what are the triggers to do so?
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Larry Swedroe: Why Financial Trends Persist

Post by willthrill81 » Thu Mar 22, 2018 11:34 am

marcopolo wrote:
Thu Mar 22, 2018 11:28 am
willthrill81 wrote:
Thu Mar 22, 2018 11:07 am
marcopolo wrote:
Thu Mar 22, 2018 10:59 am
willthrill81 wrote:
Thu Mar 22, 2018 9:46 am
The fact that a widely respected Boglehead like Swedroe, who has historically been greatly opposed to market timing, has come around to trend following (after it has underperformed buy-and-hold for nearly a decade) should be very telling about the historic value of this strategy.
So, where are all the great retail investment vehicles that have used these strategies and delivered on the theoretical advantages?
I am willing to be educated, but if it is so obviously advantageous, why aren't there a myriad of products exploiting the strategy?
Because most investors aren't willing to lag behind the market for years on end. Buy-and-hold has trounced every 'mainstream' trend following strategy for the last nine years.

David Stein from the Money for the Rest of Us podcast recounts his experience dealing with college endowments and other investment groups. When he asked them how long they would stick with a manager who was underperforming the market, they said one or two years.
That would be an explanation if there were NO trend following products at all (no market interest), but i am not sure that would explain why the ones that do exist have not delivered as promised . Trend following concept has been around much longer than the last ten years. Was there a retail product that performed as advertised back then? There should have been some that did great during 2000-2002, and 2007-2009. Wouldn't they have been shouting from the roof tops about how great they held up? You would think some of them would have attracted a following. Maybe they exist, and i am just not aware of them.
I think that most trend followers aren't interested in products; they'd rather do it themselves. Even with a simple buy-and-hold strategy of index funds, look at all of the options out there for investors to choose from: LC, LCG, LCV, MC, MCV, SCV, EM, ex-US, balanced funds, etc. There are exponentially more options when you introduce trend following, which can take on many forms, and finding one that is appealing to a critical mass of the market is a challenge, especially when you couple that with likely underperformance during bull markets.
marcopolo wrote:
Thu Mar 22, 2018 11:28 am
Also, how much will they outperform when the market does inevitably turn negative? Will it make up for the decade of severe under performance?
Is the recommendation to live with the under performance in hopes of down side protection, or is the investor supposed to jump in and out of this strategy. If so, what are the triggers to do so?
Rather than type all of it out, I'll refer you to this excellent, very thorough post on the topic: http://www.philosophicaleconomics.com/2 ... ngaverage/

From 2010-now, buy-and-hold has beaten every trend following system I've seen. But if you include 2008-now, every trend following system I've seen has robustly beaten buy-and-hold in every way.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Larry Swedroe: Why Financial Trends Persist

Post by willthrill81 » Thu Mar 22, 2018 11:38 am

nisiprius wrote:
Wed Mar 21, 2018 5:33 pm
Larry Swedroe's spends much of the article discussing two papers by Mebane Faber on trend-following and timing strategies. Since Faber's second article say that his strategy has performed well from 2006 through 2016, it is relevant to see the results were when Faber applied them to an ETF, GTAA, which he managed--using trend-following and timing strategies--from 2010 through 2014.
I think this quote below from a longer and excellent post at Philosophical Economics explains the situation well.
Everyone agrees that it’s appropriate to divide the space of a portfolio between different asset classes–to put, for example, 60% of a portfolio’s space into equities, and 40% of its space into fixed income. “Market Timing” does the same thing, except with time. It divides the time of a portfolio between different asset classes, in an effort to take advantage of the times in which those asset classes tend to produce the highest returns.

What’s so controversial about the idea of splitting the time of a portfolio between different asset classes, as we might do with a portfolio’s space? Why do the respected experts on investing almost unanimously discourage it?

The reason can’t be transaction costs. Those costs have been whittled down to almost nothing over the years.

The reason can’t be negative tax consequences. An investor can largely avoid those consequences through the use of futures contracts. Suppose, for example, that an investor owns shares of an S&P 500 ETF as a core long-term position in a taxable account, and wants to temporarily go to cash in advance of some expected period of market turbulence. To do that, she need not sell the shares themselves. Instead, she can sell an S&P 500 futures contract in an amount equal to the size of the ETF position. The sale will perfectly offset her exposure to the S&P 500, bringing it down to exactly zero, without triggering a taxable capital gain. When she wants to re-enter the market, she can simply buy back the futures contract, removing the hedge. The only negative tax implication is that during the period in which she holds the hedge, her position will count as a section 1092 “straddle”, and any qualified dividends that she receives will be taxed as ordinary income. But that’s a very small impact, especially if the hedged period is brief.

The reason can’t be poor timing. For if markets are efficient, as opponents of market timing argue, then it shouldn’t possible for an individual to time the market “poorly.” As a rule, any choice of when to exit the market should be just as good as any other. If a person were able to consistently defy that rule, then reliably beating the market would be as simple as building a strategy to do the exact opposite of what that person does.
In my view, the reason that market timing is so heavily discouraged is two-fold:

(1) Market timing requires big choices, and big choices create big stress, especially when so much is at stake. Large amounts of stress usually lead to poor outcomes, not only in investing, but in everything.

(2) The most vocal practitioners of market timing tend to perform poorly as investors.

Looking at (2) specifically, why do the most vocal practitioners of market timing tend to perform poorly as investors? The answer is not that they are poor market timers per se. Rather, the answer is that they tend to always be underinvested. By nature, they’re usually more risk-averse to begin with, which is what sends them down the path of identifying problems in the market and stepping aside. Once they do step aside, they find it difficult to get back in, especially when the market has gone substantially against them. It’s painful to sell something and then buy it back at a higher price, locking in a loss. It’s even more difficult to admit that the loss was the result of one’s being wrong. And so instead of doing that, the practitioners entrench. They come up with reasons to stay on the course they’re on–a course that ends up producing a highly unattractive investment outcome.

To return to our space-time analogy, if an investor were to allocate 5% of the space of her portfolio to equities, and 95% to cash, her long-term performance would end up being awful. The reason would be clear–she isn’t taking risk, and if you don’t take risk, you don’t make money. But notice that we wouldn’t use her underperformance to discredit the concept of “diversification” itself, the idea that dividing the space of a portfolio between different asset classes might improve the quality of returns. We wouldn’t say that people that allocate 60/40 or 80/20 are doing things wrong. They’re fine. The problem is not in the concept of what they’re doing, but in her specific implementation of it.

Well, the same point extends to market timing. If a vocal practitioner of market timing ends up spending 5% of his time in equities, and 95% in cash, because he got out of the market and never managed to get back in, we shouldn’t use his predictably awful performance to discredit the concept of “market timing” itself, the idea that dividing a portfolio’s time between different asset classes might improve returns. We shouldn’t conclude that investors that run market timing strategies that stay invested most of the time are doing things wrong. The problem is not in the concept of what they’re doing, but in his specific implementation of it.
http://www.philosophicaleconomics.com/2 ... ngaverage/
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Re: Larry Swedroe: Why Financial Trends Persist

Post by marcopolo » Thu Mar 22, 2018 12:17 pm

willthrill81 wrote:
Thu Mar 22, 2018 11:34 am
marcopolo wrote:
Thu Mar 22, 2018 11:28 am
willthrill81 wrote:
Thu Mar 22, 2018 11:07 am
marcopolo wrote:
Thu Mar 22, 2018 10:59 am
willthrill81 wrote:
Thu Mar 22, 2018 9:46 am
The fact that a widely respected Boglehead like Swedroe, who has historically been greatly opposed to market timing, has come around to trend following (after it has underperformed buy-and-hold for nearly a decade) should be very telling about the historic value of this strategy.
So, where are all the great retail investment vehicles that have used these strategies and delivered on the theoretical advantages?
I am willing to be educated, but if it is so obviously advantageous, why aren't there a myriad of products exploiting the strategy?
Because most investors aren't willing to lag behind the market for years on end. Buy-and-hold has trounced every 'mainstream' trend following strategy for the last nine years.

David Stein from the Money for the Rest of Us podcast recounts his experience dealing with college endowments and other investment groups. When he asked them how long they would stick with a manager who was underperforming the market, they said one or two years.
That would be an explanation if there were NO trend following products at all (no market interest), but i am not sure that would explain why the ones that do exist have not delivered as promised . Trend following concept has been around much longer than the last ten years. Was there a retail product that performed as advertised back then? There should have been some that did great during 2000-2002, and 2007-2009. Wouldn't they have been shouting from the roof tops about how great they held up? You would think some of them would have attracted a following. Maybe they exist, and i am just not aware of them.
I think that most trend followers aren't interested in products; they'd rather do it themselves. Even with a simple buy-and-hold strategy of index funds, look at all of the options out there for investors to choose from: LC, LCG, LCV, MC, MCV, SCV, EM, ex-US, balanced funds, etc. There are exponentially more options when you introduce trend following, which can take on many forms, and finding one that is appealing to a critical mass of the market is a challenge, especially when you couple that with likely underperformance during bull markets.
marcopolo wrote:
Thu Mar 22, 2018 11:28 am
Also, how much will they outperform when the market does inevitably turn negative? Will it make up for the decade of severe under performance?
Is the recommendation to live with the under performance in hopes of down side protection, or is the investor supposed to jump in and out of this strategy. If so, what are the triggers to do so?
Rather than type all of it out, I'll refer you to this excellent, very thorough post on the topic: http://www.philosophicaleconomics.com/2 ... ngaverage/

From 2010-now, buy-and-hold has beaten every trend following system I've seen. But if you include 2008-now, every trend following system I've seen has robustly beaten buy-and-hold in every way.
Your explanation again would account for why there aren't any (many) trend following products. Some do exist, nispirius analyzed one that was run by one Faber. But, I still don't see how your reasoning would explain their failure to deliver on the promised results. There have been some down turns since 2010, one just barely shy of meeting the strict definition of a bear market, the fund run by an expert in trend following does not appear to have provided much protection, Maybe the ~20% drop was not large enough, or long enough?

Thanks for the reference, i will have to spend some time reading and understanding it.
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Re: Larry Swedroe: Why Financial Trends Persist

Post by lack_ey » Thu Mar 22, 2018 12:24 pm

marcopolo wrote:
Thu Mar 22, 2018 10:59 am
willthrill81 wrote:
Thu Mar 22, 2018 9:46 am
The fact that a widely respected Boglehead like Swedroe, who has historically been greatly opposed to market timing, has come around to trend following (after it has underperformed buy-and-hold for nearly a decade) should be very telling about the historic value of this strategy.
So, where are all the great retail investment vehicles that have used these strategies and delivered on the theoretical advantages?
I am willing to be educated, but if it is so obviously advantageous, why aren't there a myriad of products exploiting the strategy?
Look at the decades of results of managed futures strategies beyond mutual funds (they've been late to come to that format) and commodity trading advisors (CTAs). Or are you specifically interested in retail products, non-institutional?

Now, the problem is that there are issues with survivorship bias, perhaps selective reporting, etc. and data quality is lower than for mutual funds. But there's a BTOP50 index for one.

There is live trading data since 1987. You can find individual funds (not mutual funds) older than that, I think.

Warning to those not familiar: managed futures, trend following in the above context is long/short, usually around net zero beta to the market. It is usually long and short a lot of different assets, not just the stock market. Traditionally and usually this includes at least commodities futures. This is different from the kind of in/out of the market strategy like Meb Faber in terms of average exposure.

FWIW I took a quick look at the BTOP50 index returns, for all its potential issues, comparing the index return (minus risk-free rate) to the stock market excess return via French library data (Mkt-RF). The correlation in the monthly returns January 1987 through January 2018 is -0.06. The market beta for BTOP50 is -0.024 (t=-0.73). Though if you look at upside and downside beta, regressing instead of months with positive and negative market returns respectively, the betas then are 0.105 (t=2.37) and -0.163 (t=-3.45). That follows the result in the literature of the so-called smile. Warning: as per the usual sloppy conventions, t-stats are not actually correct because of heteroscedasticity that was not accounted for. If doing more serious analysis there should be better methods and some corrections to be made because we know vol isn't constant.

Or if you're talking about in/out market timing funds, those tend to open and close. They're hard for a lot of people to justify and find it difficult to stay open because investors will at times see underperformance combined with mid-high ERs on a portfolio that's just holding cash (or the safe asset) a non-trivial amount of the time. That's not a good look. Some of the asset allocation / tactical allocation funds these days may trade on trend signals rather than fundamentals or manger gut feeling or whatever else.

The above result for BTOP50 doesn't necessarily generalize to show much of anything about in/out equity market timing strategies because of all the differences, but I thought some might find it somewhat useful. For one, if you're in/out timing, you're going to be net long on average, not around zero. Still, the hope is for the active or relative return compared to random timing being like that.
marcopolo wrote:
Thu Mar 22, 2018 10:59 am
I believe the well-respected founders of LTCM also had very good theoretical underpinnings of their strategy, as have a long list other strategies that look great in retrospect, but fail to deliver when implemented.
Why does everybody bring up LTCM and how does it relate here? Also, the kind of core strategy they were known for—convergence trading, especially in fixed income and Treasury bonds—is fine and also isn't that complicated at all, and is used in various forms to this day profitably. Though obviously not always profitably. And if you take inordinate amounts of risk as well as take other kinds of directional bets, and everybody else knows about it, no big surprise if you blow up one day.


As for the methodological issues, reporting bias in these kinds of financial research, I think it should be pretty uncontroversial and clear that there are problems and caveats along these lines, results in general probably not likely to be as strong out of sample, etc. Even if the underlying financial markets and relative returns did not change, you would expect some or a lot of slippage. Add to the fact that markets evolve and even past patterns that were legitimate may not continue, and you're of course dealing with more uncertainty.

I do have to say that trend following-type strategies have some of the longest empirical live trading histories to look at, though, in addition to the backtests that have been done.
Last edited by lack_ey on Thu Mar 22, 2018 12:37 pm, edited 1 time in total.

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Re: Larry Swedroe: Why Financial Trends Persist

Post by HomerJ » Thu Mar 22, 2018 12:35 pm

nisiprius wrote:
Wed Mar 21, 2018 5:33 pm
I do not know why Faber seemingly was unable to apply his trend following and timing algorithms successfully, in a real-world context, over a time period when his paper said these strategies had worked well.
Because nobody knows enough.

There are too many variables, nobody fully knows the rules of the game, AND the rules even change over time.

Pure hubris to think one can predict the future in economics.

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Re: Larry Swedroe: Why Financial Trends Persist

Post by lack_ey » Thu Mar 22, 2018 12:42 pm

HomerJ wrote:
Thu Mar 22, 2018 12:35 pm
nisiprius wrote:
Wed Mar 21, 2018 5:33 pm
I do not know why Faber seemingly was unable to apply his trend following and timing algorithms successfully, in a real-world context, over a time period when his paper said these strategies had worked well.
Because nobody knows enough.

There are too many variables, nobody fully knows the rules of the game, AND the rules even change over time.

Pure hubris to think one can predict the future in economics.
...

Again,
lack_ey wrote:
Wed Mar 21, 2018 6:32 pm
From the article:
In reviewing his findings, Faber noted: “Though the timing system outperformed by a significant amount during the 2008–2009 bear market, it went on to underperform stocks six of the next eight years. Many investors who had implemented the timing model after the crash likely struggled with staying the course with a tactical approach.”
The strategies worked well over this later window BECAUSE OF 2008-2009, not afterwards, where nisiprius was evaluating. GTAA did not launch prior to 2008-2009.

Also, again, GTAA was not a US equity market timing fund and was in multiple assets. And maybe was not quite the same anyhow. None of this excuses the results and I was not invested in or interested in GTAA.
Last edited by lack_ey on Thu Mar 22, 2018 12:43 pm, edited 1 time in total.

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Re: Larry Swedroe: Why Financial Trends Persist

Post by Random Walker » Thu Mar 22, 2018 12:43 pm

Marcopolo wrote
I am not sure what we are supposed to make of those results, is that good or bad, what are we comparing it to?
I think that by asking the question it shows that you are thinking correctly. The time frames are way too short to be meaningful. And I’m not sure there is anything reasonable to compare it to: it sort of is what it is. In my case, emphasizing the diversification benefit, willing to add a bit of risk, and taking from muni bonds to create the position, I guess I can compare to muni bonds. But I tend not to do much looking at individual portfolio components except for entertainment. I mostly look at the portfolio as a whole.
Someone on the board recently quoted Winston Churchill something to the effect “no matter how good a strategy is in theory, at some point one should get around to looking at actual results”. Perhaps I should consider that :-)

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Re: Larry Swedroe: Why Financial Trends Persist

Post by bradshaw1965 » Thu Mar 22, 2018 12:55 pm

Momentum is interesting because it's hard to put sound reasoning behind it like you can with value (investors demand a higher return from riskier assets). Still seems to hold up though at least as well as these things tend to hold up.

I still think the individual investor would have a hard time studying a factor, decide which ones are important (there are always new factors) and then sitting on their hands for their entire investment lifetimes for the factor to reward you. The great commodity upswing and downswing is a good example, and my personal bugaboo investing in micro-caps (BRSIX) in taxable and then enduring huge capital gain distributions.

I do think simplicity might be slightly over-rated, it's not that hard to rebalance into varied asset classes, but a lifetime of factor-investing would be very stressful for an individual investor.

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Re: Larry Swedroe: Why Financial Trends Persist

Post by HomerJ » Thu Mar 22, 2018 12:57 pm

Random Walker wrote:
Thu Mar 22, 2018 12:43 pm
Someone on the board recently quoted Winston Churchill something to the effect “no matter how good a strategy is in theory, at some point one should get around to looking at actual results”. Perhaps I should consider that :-)
Absolutely.

Instead of looking at back-tested strategies, go look for predictions in the past made by Swedroe, and Faber, and Shiller, and a hundred other PhDs.

Find the article in 2010 where Swedroe predicts 4.5% real returns going forward, and instead we gotten like 12% real so far.

Find the article in 1996 where Shiller predicted 0% real 10-year returns going forward, and instead we got like 6% real.

Don't show me back-looking articles from "experts".

Show me predictions made 10-20-30 years ago that actually turned out to be right.

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Re: Larry Swedroe: Why Financial Trends Persist

Post by marcopolo » Thu Mar 22, 2018 1:08 pm

lack_ey wrote:
Thu Mar 22, 2018 12:24 pm
marcopolo wrote:
Thu Mar 22, 2018 10:59 am
willthrill81 wrote:
Thu Mar 22, 2018 9:46 am
The fact that a widely respected Boglehead like Swedroe, who has historically been greatly opposed to market timing, has come around to trend following (after it has underperformed buy-and-hold for nearly a decade) should be very telling about the historic value of this strategy.
So, where are all the great retail investment vehicles that have used these strategies and delivered on the theoretical advantages?
I am willing to be educated, but if it is so obviously advantageous, why aren't there a myriad of products exploiting the strategy?
Look at the decades of results of managed futures strategies beyond mutual funds (they've been late to come to that format) and commodity trading advisors (CTAs). Or are you specifically interested in retail products, non-institutional?

Now, the problem is that there are issues with survivorship bias, perhaps selective reporting, etc. and data quality is lower than for mutual funds. But there's a BTOP50 index for one.

There is live trading data since 1987. You can find individual funds (not mutual funds) older than that, I think.

Warning to those not familiar: managed futures, trend following in the above context is long/short, usually around net zero beta to the market. It is usually long and short a lot of different assets, not just the stock market. Traditionally and usually this includes at least commodities futures. This is different from the kind of in/out of the market strategy like Meb Faber in terms of average exposure.

FWIW I took a quick look at the BTOP50 index returns, for all its potential issues, comparing the index return (minus risk-free rate) to the stock market excess return via French library data (Mkt-RF). The correlation in the monthly returns January 1987 through January 2018 is -0.06. The market beta for BTOP50 is -0.024 (t=-0.73). Though if you look at upside and downside beta, regressing instead of months with positive and negative market returns respectively, the betas then are 0.105 (t=2.37) and -0.163 (t=-3.45). That follows the result in the literature of the so-called smile. Warning: as per the usual sloppy conventions, t-stats are not actually correct because of heteroscedasticity that was not accounted for. If doing more serious analysis there should be better methods and some corrections to be made because we know vol isn't constant.

Or if you're talking about in/out market timing funds, those tend to open and close. They're hard for a lot of people to justify and find it difficult to stay open because investors will at times see underperformance combined with mid-high ERs on a portfolio that's just holding cash (or the safe asset) a non-trivial amount of the time. That's not a good look. Some of the asset allocation / tactical allocation funds these days may trade on trend signals rather than fundamentals or manger gut feeling or whatever else.

The above result for BTOP50 doesn't necessarily generalize to show much of anything about in/out equity market timing strategies because of all the differences, but I thought some might find it somewhat useful. For one, if you're in/out timing, you're going to be net long on average, not around zero. Still, the hope is for the active or relative return compared to random timing being like that.
marcopolo wrote:
Thu Mar 22, 2018 10:59 am
I believe the well-respected founders of LTCM also had very good theoretical underpinnings of their strategy, as have a long list other strategies that look great in retrospect, but fail to deliver when implemented.
Why does everybody bring up LTCM and how does it relate here? Also, the kind of core strategy they were known for—convergence trading, especially in fixed income and Treasury bonds—is fine and also isn't that complicated at all, and is used in various forms to this day profitably. Though obviously not always profitably. And if you take inordinate amounts of risk as well as take other kinds of directional bets, and everybody else knows about it, no big surprise if you blow up one day.


As for the methodological issues, reporting bias in these kinds of financial research, I think it should be pretty uncontroversial and clear that there are problems and caveats along these lines, results in general probably not likely to be as strong out of sample, etc. Even if the underlying financial markets and relative returns did not change, you would expect some or a lot of slippage. Add to the fact that markets evolve and even past patterns that were legitimate may not continue, and you're of course dealing with more uncertainty.

I do have to say that trend following-type strategies have some of the longest empirical live trading histories to look at, though, in addition to the backtests that have been done.
Thanks again for the detailed response, I always find these discussions very educational, even if don't always agree with them.

I was specifically asking about retail products because i do not have access to institutional products.

I only brought up LTCM because somebody mentioned that because widely respected people are starting to believe in trend following, that lends credence to their value. I brought up LTCM as a counter example to that line of reasoning, not because it has anything to do with trend following specifically. I think both statements were a bit "tongue in cheek"

You seem to have changed horses a bit mid-stream here. The products you are discussing, as you say yourself, are actually quite different than the time-based in/out trend following that is the subject of the original article. maybe they are correlated, but i am not sure i would make the leap from one to the other.

Interesting point about investors not sticking with trend following products because of their long periods of under performance. Some have the same issue with "staying the course" strategies. Investors perform poorly with "stay the course" when they bail because the market is doing poorly. You are saying they perform poorly with trend following when they bail because the market is doing well. Pick your poison, i guess?
Last edited by marcopolo on Thu Mar 22, 2018 1:15 pm, edited 1 time in total.
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Re: Larry Swedroe: Why Financial Trends Persist

Post by marcopolo » Thu Mar 22, 2018 1:12 pm

HomerJ wrote:
Thu Mar 22, 2018 12:57 pm

Show me predictions made 10-20-30 years ago that actually turned out to be right.
That is too easy. Even a broken clock is right a couple times a day.
You really have to find the expert that is pretty consistently right. As far as I am aware, no such (mythical) beast exists.
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Re: Larry Swedroe: Why Financial Trends Persist

Post by HomerJ » Thu Mar 22, 2018 1:15 pm

marcopolo wrote:
Thu Mar 22, 2018 1:12 pm
HomerJ wrote:
Thu Mar 22, 2018 12:57 pm

Show me predictions made 10-20-30 years ago that actually turned out to be right.
That is too easy. Even a broken clock is right a couple times a day.
You really have to find the expert that is pretty consistently right. As far as I am aware, no such (mythical) beast exists.
Well, yes, that's what I meant... Thank you for clarifying.

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Re: Larry Swedroe: Why Financial Trends Persist

Post by nisiprius » Thu Mar 22, 2018 2:09 pm

In 1940, in 'Where are the Customers' Yachts,' Fred Schwed wrote:All I was ever able to conclude from my informal studies was that chart reading is a complex way of arriving at a simple theorem, to wit: when [stocks] have gone up for a considerable time, they will continue to go up for a considerable time; and the same holds true for going down. This is simple, but it does not happen to be so. The easiest way of perceiving that it is not so is to go get a properly drawn chart and look at it.
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Re: Larry Swedroe: Why Financial Trends Persist

Post by willthrill81 » Thu Mar 22, 2018 3:02 pm

marcopolo wrote:
Thu Mar 22, 2018 12:17 pm
But, I still don't see how your reasoning would explain their failure to deliver on the promised results. There have been some down turns since 2010, one just barely shy of meeting the strict definition of a bear market, the fund run by an expert in trend following does not appear to have provided much protection, Maybe the ~20% drop was not large enough, or long enough?
In an environment with no bear markets and no recessions, the best course of action is to buy-and-hold. Trend following in such a scenario will inevitably result in some whipsaws, selling at one price and buying back in at a higher one, reducing your returns compared to B&H. Since March of 2009, we have been in just that scenario. But without a working crystal ball, I don't know that that will be the case for the next nine years (I strongly suspect that it will be otherwise). And if we include periods with recessions and bear markets, trend following has done very well, and I suspect that this will continue to be the case going forward. YMMV.

Further, if we only 'engage' trend following when the early warning signs are pointing to a recession (e.g. unemployment rate is trend upward), the whipsaws have been reduced and the returns further enhanced. See the above link to Philosophical Economics for an explanation of the how and why.
marcopolo wrote:
Thu Mar 22, 2018 1:08 pm
Interesting point about investors not sticking with trend following products because of their long periods of under performance. Some have the same issue with "staying the course" strategies. Investors perform poorly with "stay the course" when they bail because the market is doing poorly. You are saying they perform poorly with trend following when they bail because the market is doing well. Pick your poison, i guess?
There are risks to any investment strategy. With B&H, the risk is that you'll abandon it in a deep bear market, as many did in the last one. With trend following, the risk is that you'll abandon it after years of underperforming the broad market in a good bull market.

"Stay the course" is applicable to both strategies. Constant switching between them is a recipe for disaster.
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Re: Larry Swedroe: Why Financial Trends Persist

Post by Random Walker » Thu Mar 22, 2018 3:16 pm

HomerJ,
But there is some rationale to my not looking backward at the results of individual funds. I might look back say 1,3, 5, years? Timeframes like that are meaningless. What would I do with the data? We really can only invest looking forward. I’d go with 50, 80, or 100 years of data to make decisions over my own personal time frame. I realize that there are advantages to looking at longest data available and also more recent data and possibly more relevant data that is available. But my own personal past timeframe, very important to my wallet, but not likely to be most useful data for making decisions about investing future.

Dave

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Re: Larry Swedroe: Why Financial Trends Persist

Post by willthrill81 » Thu Mar 22, 2018 3:20 pm

Random Walker wrote:
Thu Mar 22, 2018 3:16 pm
I might look back say 1,3, 5, years? Timeframes like that are meaningless.
It will be interesting to see equity funds' 10 year performance in another year, once 2008 is out of the picture. Even if the market goes sideways or dips this year, 10 year performance is still very likely to get a significant boost.
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Re: Larry Swedroe: Why Financial Trends Persist

Post by lack_ey » Thu Mar 22, 2018 3:30 pm

marcopolo wrote:
Thu Mar 22, 2018 1:08 pm
You seem to have changed horses a bit mid-stream here. The products you are discussing, as you say yourself, are actually quite different than the time-based in/out trend following that is the subject of the original article. maybe they are correlated, but i am not sure i would make the leap from one to the other.
They're somewhat correlated. The main differences would be (1) owning non-equities and (2) average net exposure. But underlying principal of following trends is similar and produces "in" (long) and "out" (short) signals in a correlated fashion with the other.

I guess there was a bit of a miscommunication because I interpreted "trend following" more broadly. Larry Swedroe's article goes over both in/out market timing based on moving averages, Meb Faber style, as well as trend following in the sense of long/short multi-asset following trends as in managed futures funds. Some of the prior posts in the thread are about the latter as well. As such I thought we were talking about trend following in any form, so I gave examples of that.

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Re: Larry Swedroe: Why Financial Trends Persist

Post by marcopolo » Thu Mar 22, 2018 3:36 pm

willthrill81 wrote:
Thu Mar 22, 2018 3:02 pm
marcopolo wrote:
Thu Mar 22, 2018 12:17 pm
But, I still don't see how your reasoning would explain their failure to deliver on the promised results. There have been some down turns since 2010, one just barely shy of meeting the strict definition of a bear market, the fund run by an expert in trend following does not appear to have provided much protection, Maybe the ~20% drop was not large enough, or long enough?
In an environment with no bear markets and no recessions, the best course of action is to buy-and-hold. Trend following in such a scenario will inevitably result in some whipsaws, selling at one price and buying back in at a higher one, reducing your returns compared to B&H. Since March of 2009, we have been in just that scenario. But without a working crystal ball, I don't know that that will be the case for the next nine years (I strongly suspect that it will be otherwise). And if we include periods with recessions and bear markets, trend following has done very well, and I suspect that this will continue to be the case going forward. YMMV.

Further, if we only 'engage' trend following when the early warning signs are pointing to a recession (e.g. unemployment rate is trend upward), the whipsaws have been reduced and the returns further enhanced. See the above link to Philosophical Economics for an explanation of the how and why.
marcopolo wrote:
Thu Mar 22, 2018 1:08 pm
Interesting point about investors not sticking with trend following products because of their long periods of under performance. Some have the same issue with "staying the course" strategies. Investors perform poorly with "stay the course" when they bail because the market is doing poorly. You are saying they perform poorly with trend following when they bail because the market is doing well. Pick your poison, i guess?
There are risks to any investment strategy. With B&H, the risk is that you'll abandon it in a deep bear market, as many did in the last one. With trend following, the risk is that you'll abandon it after years of underperforming the broad market in a good bull market.

"Stay the course" is applicable to both strategies. Constant switching between them is a recipe for disaster.
There are now few funds (seems to be fairly recently opened) that claim to do trend following, it will be interesting to see how they perform through the next major downturn. I guess the ~20% downturn in 2011 or the 16% in 2010 are not considered sufficient to test the protection against downside theory?

You make it sound so simple to identify when recessions are going to start, so we can simply "engage" and presumably just as easily disengage from trend following. If that were possible why not just use a triple-leverage inverse fund and really reap the benefits of being able to identify those inflection points?

I think we agree that constant switching is bad. i have less faith than you that less frequent switching can be pulled-off as easily as you make it sound.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Larry Swedroe: Why Financial Trends Persist

Post by willthrill81 » Thu Mar 22, 2018 3:45 pm

marcopolo wrote:
Thu Mar 22, 2018 3:36 pm
I think we agree that constant switching is bad. i have less faith than you that less frequent switching can be pulled-off as easily as you make it sound.
It's not difficult to do. But how successful it or any other strategy will be going forward is unknown.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Larry Swedroe: Why Financial Trends Persist

Post by marcopolo » Thu Mar 22, 2018 3:52 pm

willthrill81 wrote:
Thu Mar 22, 2018 3:45 pm
marcopolo wrote:
Thu Mar 22, 2018 3:36 pm
I think we agree that constant switching is bad. i have less faith than you that less frequent switching can be pulled-off as easily as you make it sound.
It's not difficult to do. But how successful it or any other strategy will be going forward is unknown.
That's odd, i thought the fact that it is unknown going forward is what makes it difficult.

I agree it's easy to identify looking backwards, but we can't invest in the past.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Larry Swedroe: Why Financial Trends Persist

Post by willthrill81 » Thu Mar 22, 2018 4:01 pm

marcopolo wrote:
Thu Mar 22, 2018 3:52 pm
willthrill81 wrote:
Thu Mar 22, 2018 3:45 pm
marcopolo wrote:
Thu Mar 22, 2018 3:36 pm
I think we agree that constant switching is bad. i have less faith than you that less frequent switching can be pulled-off as easily as you make it sound.
It's not difficult to do. But how successful it or any other strategy will be going forward is unknown.
That's odd, i thought the fact that it is unknown going forward is what makes it difficult.

I agree it's easy to identify looking backwards, but we can't invest in the past.
What I meant is that it's not difficult to determine when to pull the trigger. But we don't know how successful that trigger pull will be.

For instance:
2000-2009: buy-and-hold of VTSMX resulted in an annualized real loss of 2.73%.
2000-2009: 200 day moving average strategy with VTSMX, using VBMFX as the out-of-market asset, resulted in an annualized real gain of 7.33%.

2010-2017: buy-and-hold of VTSMX resulted in an annualized real gain of 11.94%.
2010-2017: 200 day moving average strategy with VTSMX, using VBMFX as the out-of-market asset, resulted in an annualized real gain of 8.83%.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Larry Swedroe: Why Financial Trends Persist

Post by marcopolo » Thu Mar 22, 2018 4:12 pm

willthrill81 wrote:
Thu Mar 22, 2018 4:01 pm
marcopolo wrote:
Thu Mar 22, 2018 3:52 pm
willthrill81 wrote:
Thu Mar 22, 2018 3:45 pm
marcopolo wrote:
Thu Mar 22, 2018 3:36 pm
I think we agree that constant switching is bad. i have less faith than you that less frequent switching can be pulled-off as easily as you make it sound.
It's not difficult to do. But how successful it or any other strategy will be going forward is unknown.
That's odd, i thought the fact that it is unknown going forward is what makes it difficult.

I agree it's easy to identify looking backwards, but we can't invest in the past.
What I meant is that it's not difficult to determine when to pull the trigger. But we don't know how successful that trigger pull will be.

For instance:
2000-2009: buy-and-hold of VTSMX resulted in an annualized real loss of 2.73%.
2000-2009: 200 day moving average strategy with VTSMX, using VBMFX as the out-of-market asset, resulted in an annualized real gain of 7.33%.

2010-2017: buy-and-hold of VTSMX resulted in an annualized real gain of 11.94%.
2010-2017: 200 day moving average strategy with VTSMX, using VBMFX as the out-of-market asset, resulted in an annualized real gain of 8.83%.
Now i am really confused.

Isn't the whole idea of "determining" when to pull the trigger based on the premise that doing so will improve performance?
If you are saying, I can easily decide when to pull the trigger, but it might or might not perform any better, then why not just use a random number generator to identify the trigger?
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Larry Swedroe: Why Financial Trends Persist

Post by willthrill81 » Thu Mar 22, 2018 4:18 pm

marcopolo wrote:
Thu Mar 22, 2018 4:12 pm
willthrill81 wrote:
Thu Mar 22, 2018 4:01 pm
marcopolo wrote:
Thu Mar 22, 2018 3:52 pm
willthrill81 wrote:
Thu Mar 22, 2018 3:45 pm
marcopolo wrote:
Thu Mar 22, 2018 3:36 pm
I think we agree that constant switching is bad. i have less faith than you that less frequent switching can be pulled-off as easily as you make it sound.
It's not difficult to do. But how successful it or any other strategy will be going forward is unknown.
That's odd, i thought the fact that it is unknown going forward is what makes it difficult.

I agree it's easy to identify looking backwards, but we can't invest in the past.
What I meant is that it's not difficult to determine when to pull the trigger. But we don't know how successful that trigger pull will be.

For instance:
2000-2009: buy-and-hold of VTSMX resulted in an annualized real loss of 2.73%.
2000-2009: 200 day moving average strategy with VTSMX, using VBMFX as the out-of-market asset, resulted in an annualized real gain of 7.33%.

2010-2017: buy-and-hold of VTSMX resulted in an annualized real gain of 11.94%.
2010-2017: 200 day moving average strategy with VTSMX, using VBMFX as the out-of-market asset, resulted in an annualized real gain of 8.83%.
Now i am really confused.

Isn't the whole idea of "determining" when to pull the trigger based on the premise that doing so will improve performance?
If you are saying, I can easily decide when to pull the trigger, but it might or might not perform any better, then why not just use a random number generator to identify the trigger?
I offered the backtested results to merely indicate that it's not a slam dunk either way. Trend following was a huge boon from 2000-2009, but buy-and-hold did significantly better from 2010-2017. There are no guarantees as to which will come out ahead for your particular time frame.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Larry Swedroe: Why Financial Trends Persist

Post by long_gamma » Fri Mar 23, 2018 6:30 am

marcopolo wrote:
Thu Mar 22, 2018 10:59 am
willthrill81 wrote:
Thu Mar 22, 2018 9:46 am
The fact that a widely respected Boglehead like Swedroe, who has historically been greatly opposed to market timing, has come around to trend following (after it has underperformed buy-and-hold for nearly a decade) should be very telling about the historic value of this strategy.
So, where are all the great retail investment vehicles that have used these strategies and delivered on the theoretical advantages?
I am willing to be educated, but if it is so obviously advantageous, why aren't there a myriad of products exploiting the strategy? I believe the well-respected founders of LTCM also had very good theoretical underpinnings of their strategy, as have a long list other strategies that look great in retrospect, but fail to deliver when implemented.
Well, MTUM etf is a retail product which employs time series momentum has done pretty well

Image

There are many managed future funds which has beaten SPX with much lower allocation to equity asset class.
viewtopic.php?f=10&t=243620&p=3824072#p3824072

viewtopic.php?f=10&t=241059&p=3776124#p3774682
"Everyone has a plan 'till they get punched in the mouth." --Mike Tyson

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Re: Larry Swedroe: Why Financial Trends Persist

Post by marcopolo » Fri Mar 23, 2018 7:43 am

long_gamma wrote:
Fri Mar 23, 2018 6:30 am
marcopolo wrote:
Thu Mar 22, 2018 10:59 am
willthrill81 wrote:
Thu Mar 22, 2018 9:46 am
The fact that a widely respected Boglehead like Swedroe, who has historically been greatly opposed to market timing, has come around to trend following (after it has underperformed buy-and-hold for nearly a decade) should be very telling about the historic value of this strategy.
So, where are all the great retail investment vehicles that have used these strategies and delivered on the theoretical advantages?
I am willing to be educated, but if it is so obviously advantageous, why aren't there a myriad of products exploiting the strategy? I believe the well-respected founders of LTCM also had very good theoretical underpinnings of their strategy, as have a long list other strategies that look great in retrospect, but fail to deliver when implemented.
Well, MTUM etf is a retail product which employs time series momentum has done pretty well

Image

There are many managed future funds which has beaten SPX with much lower allocation to equity asset class.
viewtopic.php?f=10&t=243620&p=3824072#p3824072

viewtopic.php?f=10&t=241059&p=3776124#p3774682
That is indeed pretty impressive performance. Thanks for bringing to out attention. I do like the fact that it has pretty low expenses, unlike most of the AQR products that are usually put forth for these strategies.

I have not looked at the details, but are we sure this fund is employing trend following as discussed here?

I am no expert on this topic, but all the proponents (the author of the article under discussion, and all those promoting the idea) all lament the under performance of such strategies during bull markets (made up for during bears) as a natural characteristic of the approach. This fund seems to have done quite well throughout this raging bull. Not sure what it is doing differently, but it does not seems to be behaving as trend following (as discussed here) is supposed to perform
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Larry Swedroe: Why Financial Trends Persist

Post by long_gamma » Fri Mar 23, 2018 8:12 am

marcopolo wrote:
Fri Mar 23, 2018 7:43 am

That is indeed pretty impressive performance. Thanks for bringing to out attention. I do like the fact that it has pretty low expenses, unlike most of the AQR products that are usually put forth for these strategies.

I have not looked at the details, but are we sure this fund is employing trend following as discussed here?

I am no expert on this topic, but all the proponents (the author of the article under discussion, and all those promoting the idea) all lament the under performance of such strategies during bull markets (made up for during bears) as a natural characteristic of the approach. This fund seems to have done quite well throughout this raging bull. Not sure what it is doing differently, but it does not seems to be behaving as trend following (as discussed here) is supposed to perform
There is no one standardized version of trend following strategy. It is basically looking into only price momentum and price volatility to make investing decisions, rather than other fundamental factors. At its core it is buying which is going up and selling which is going down and position size it either by volatility or using kelly's formula.

MTUM etf uses vol adjusted price momentum of six and twelve months. This is pretty much most of the trend following CTA does. They might differ in periods used for their signal generation. They also go short and go to different asset classes, where as MTUM is long only and sticks to large cap and mid-caps.

It is behaving differently because MTUM is the long only fund and currently in the sweet spot of the current bull market and does not invest in other asset classes which has not done well
"Everyone has a plan 'till they get punched in the mouth." --Mike Tyson

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Re: Larry Swedroe: Why Financial Trends Persist

Post by lack_ey » Fri Mar 23, 2018 11:36 am

Yeah, iShares Edge MSCI USA Momentum Factor ETF (MTUM) is 100% long-only US stocks (mid and large cap), always fully invested. Stock selection is based on whatever has had better 2-6 and 2-12 momentum, scaled by volatility. It's an index fund following a stock-picking strategy, one of a variant on cross-sectional momentum.

That's related to but not the same thing as trend following. In a down market, MTUM might buy stocks that have been losing because they have had better performance relative to the others. A trend-following approach based on moving averages would have sold by that point (or even shorted, in the case of long/short funds). That's what it means to look at which stocks have had relatively better momentum compared to other stocks.

It also should be noted that over this period, growth stocks outperformed value stocks (even more so if looking at price return and not total return), and MTUM probably will be and had been tilted to growth stocks as a byproduct of the index's stock selection process.

It's actually also done well relative to other cross-sectional momentum approaches using different screening criteria. Again, part of that is the luck of the draw of a short period. I wouldn't read much into this result or any other fund quoted in the thread.

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Re: Larry Swedroe: Why Financial Trends Persist

Post by Random Walker » Fri Mar 23, 2018 12:09 pm

As lack-ey stated. CS Momentum is market neutral because it always buys relative winners and sells relative losers. It had no net market exposure. TS Momentum is a shifting allocation strategy. The % equity exposure goes up and down depending on whether stocks are going up or down. I believe CS Momentum and TS Momentum are weakly correlated or uncorrelated generally.

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Re: Larry Swedroe: Why Financial Trends Persist

Post by Dead Man Walking » Fri Mar 23, 2018 6:48 pm

Random Walker wrote:
Fri Mar 23, 2018 12:09 pm
As lack-ey stated. CS Momentum is market neutral because it always buys relative winners and sells relative losers. It had no net market exposure. TS Momentum is a shifting allocation strategy. The % equity exposure goes up and down depending on whether stocks are going up or down. I believe CS Momentum and TS Momentum are weakly correlated or uncorrelated generally.

Dave
Dick Fabian was a pioneer in TS Momentum. During the 1980's and 1990's, he wrote the Telephone Switch Newsletter which advised investors when to buy and sell mutual funds following momentum trends. He recommended using fund companies that permitted frequent trading. Vanguard was not one of them. As I recall, there were a few actively managed funds that followed his timing techniques. I couldn't find them - they may not have survived. His methods fell out of favor at the end of the 20th century.

DMW

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Re: Larry Swedroe: Why Financial Trends Persist

Post by long_gamma » Sat Mar 24, 2018 5:56 am

lack_ey wrote:
Fri Mar 23, 2018 11:36 am
Yeah, iShares Edge MSCI USA Momentum Factor ETF (MTUM) is 100% long-only US stocks (mid and large cap), always fully invested. Stock selection is based on whatever has had better 2-6 and 2-12 momentum, scaled by volatility. It's an index fund following a stock-picking strategy, one of a variant on cross-sectional momentum.

That's related to but not the same thing as trend following. In a down market, MTUM might buy stocks that have been losing because they have had better performance relative to the others. A trend-following approach based on moving averages would have sold by that point (or even shorted, in the case of long/short funds). That's what it means to look at which stocks have had relatively better momentum compared to other stocks.
I see. I thought they used six and twelve month moving average to filter the stocks.
Although typical cross-sectional momentum is a relative value strategy which is long-short.

Trend following does not have to be moving averages, it can be break out of a channel (like famous turtle traders) or trend line break between two points (like last six months or twelve months), above or below regression line etc. As you pointed out cross sectional would have bought some of those stocks which were in negative trend. Thanks for the correction.
lack_ey wrote:
Fri Mar 23, 2018 11:36 am
I wouldn't read much into this result or any other fund quoted in the thread.
Which funds you are referring to? Managed future funds which i posted is not trend following funds? although some might combine trend following with additional factors like carry etc.
"Everyone has a plan 'till they get punched in the mouth." --Mike Tyson

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Re: Larry Swedroe: Why Financial Trends Persist

Post by Greg in Idaho » Sat Mar 24, 2018 10:05 am

"Sophisticated Noise"

Much like the often referred to noise of the everyday financial media...but wrapped in extensive and sophisticated language. Like the everyday noise, if you listen to it, it tempts you to do something you otherwise would not do investment-wise, and (quite possibly) end up with a poorer performing portfolio.

I'm not claiming there is nothing to it, but I'm going to tune it out, along with the other slice-and-dice-tilt-o-rama-strategy-du-jour-e-ink (how's THAT for sophisticated...). But that's just me, for now.

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Re: Larry Swedroe: Why Financial Trends Persist

Post by 2pedals » Sat Mar 24, 2018 12:05 pm

:shock:
nisiprius wrote:
Thu Mar 22, 2018 2:09 pm
In 1940, in 'Where are the Customers' Yachts,' Fred Schwed wrote:All I was ever able to conclude from my informal studies was that chart reading is a complex way of arriving at a simple theorem, to wit: when [stocks] have gone up for a considerable time, they will continue to go up for a considerable time; and the same holds true for going down. This is simple, but it does not happen to be so. The easiest way of perceiving that it is not so is to go get a properly drawn chart and look at it.
Like looking at things you always want to believe will happen to you but never do, i.e. TV commercials.

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Re: Larry Swedroe: Why Financial Trends Persist

Post by Riley15 » Wed Mar 28, 2018 2:24 pm

willthrill81 wrote:
Thu Mar 22, 2018 4:01 pm
marcopolo wrote:
Thu Mar 22, 2018 3:52 pm
willthrill81 wrote:
Thu Mar 22, 2018 3:45 pm
marcopolo wrote:
Thu Mar 22, 2018 3:36 pm
I think we agree that constant switching is bad. i have less faith than you that less frequent switching can be pulled-off as easily as you make it sound.
It's not difficult to do. But how successful it or any other strategy will be going forward is unknown.
That's odd, i thought the fact that it is unknown going forward is what makes it difficult.

I agree it's easy to identify looking backwards, but we can't invest in the past.
What I meant is that it's not difficult to determine when to pull the trigger. But we don't know how successful that trigger pull will be.

For instance:
2000-2009: buy-and-hold of VTSMX resulted in an annualized real loss of 2.73%.
2000-2009: 200 day moving average strategy with VTSMX, using VBMFX as the out-of-market asset, resulted in an annualized real gain of 7.33%.

2010-2017: buy-and-hold of VTSMX resulted in an annualized real gain of 11.94%.
2010-2017: 200 day moving average strategy with VTSMX, using VBMFX as the out-of-market asset, resulted in an annualized real gain of 8.83%.
Totally agree that you have to invest looking forward. I am definitely intrigued by trend following but not fully ready to implement into my plan just yet.

Since you are a trend follower. The S&P is about to move below its 200 day MA any day now. If it happens what would be a trend followers course of action be, sell all US equities and move to bonds? Following the momentum rules that's what would be dictated but somehow I feel when the economy is doing so well, it may not be wise to get out of equities but trend following would say otherwise. Also when the price moves sideways for a long time, passing the MA does not seem like a significant event. You really have to be very disciplined to use this strategy.

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Re: Larry Swedroe: Why Financial Trends Persist

Post by willthrill81 » Wed Mar 28, 2018 9:14 pm

Riley15 wrote:
Wed Mar 28, 2018 2:24 pm
willthrill81 wrote:
Thu Mar 22, 2018 4:01 pm
marcopolo wrote:
Thu Mar 22, 2018 3:52 pm
willthrill81 wrote:
Thu Mar 22, 2018 3:45 pm
marcopolo wrote:
Thu Mar 22, 2018 3:36 pm
I think we agree that constant switching is bad. i have less faith than you that less frequent switching can be pulled-off as easily as you make it sound.
It's not difficult to do. But how successful it or any other strategy will be going forward is unknown.
That's odd, i thought the fact that it is unknown going forward is what makes it difficult.

I agree it's easy to identify looking backwards, but we can't invest in the past.
What I meant is that it's not difficult to determine when to pull the trigger. But we don't know how successful that trigger pull will be.

For instance:
2000-2009: buy-and-hold of VTSMX resulted in an annualized real loss of 2.73%.
2000-2009: 200 day moving average strategy with VTSMX, using VBMFX as the out-of-market asset, resulted in an annualized real gain of 7.33%.

2010-2017: buy-and-hold of VTSMX resulted in an annualized real gain of 11.94%.
2010-2017: 200 day moving average strategy with VTSMX, using VBMFX as the out-of-market asset, resulted in an annualized real gain of 8.83%.
Totally agree that you have to invest looking forward. I am definitely intrigued by trend following but not fully ready to implement into my plan just yet.

Since you are a trend follower. The S&P is about to move below its 200 day MA any day now. If it happens what would be a trend followers course of action be, sell all US equities and move to bonds? Following the momentum rules that's what would be dictated but somehow I feel when the economy is doing so well, it may not be wise to get out of equities but trend following would say otherwise. Also when the price moves sideways for a long time, passing the MA does not seem like a significant event. You really have to be very disciplined to use this strategy.
I'm following the strategy laid out here, with the exception that I use the 7 month moving average (roughly analogous to the 140 day moving average) instead of the 200 DMA since it responds to trends more quickly. The unemployment trend rate does not currently point to a recession, so I'm staying invested regardless of what the trend following metric says to do. This coincides with your statement about the economy.

Also, I think it should be pointed out that discipline is needed to stick with any investment strategy.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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