Why don't I read about this strategy more? [12-month moving average, momentum]

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Dink2018
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Why don't I read about this strategy more? [12-month moving average, momentum]

Post by Dink2018 » Thu Sep 27, 2018 12:20 am

Hello Everyone, first time post but I've been reading for about a year.

I've read 7 or so books in the recent past about portfolio allocation, etc. I find the 3 Fund Portfolio very compelling compared to many other allocations.

What I can't get my head around is why I don't read more about using a 12 month moving average to signal buy and sell conditions relative to an index.

So here's the question:

Why not simply buy an index (like S&P500) when the 12 month moving average is flat or going up, and sell when it is going down. I don't believe I can predict the future at all, but I know for sure I can tell which way a line is going on a graph over a period of time. The key distinction here is that I want to react based on what HAPPENED, not what someone else or myself THINKS might happen. The past is very easy to see and quite easy to quantify, the future not so much.

What am I missing here, this seems far too obvious for other people far smarter than me to not have noticed. After 2k posts and several books I'm wondering why I don't see more examples of this.

Is there anyone I could hire to run scenarios for me? EG:

$1k a week DCA with 100% into VOO if trend line is flat or upward then 100% to BND when trend line heads down for 3 months
$1k a week DCA with 80% VOO and 20% BND when trend line is flat or upward then switch to 20% VOO and 80% BND

Longest time periods possible...

Two interesting posts I found (mod feel free to delete link if this isn't allowed) some of these examples use cash vs bonds.

https://realinvestmentadvice.com/you-sh ... he-market/
http://thepatternsite.com/12MonthMA.html
Last edited by Dink2018 on Fri Sep 28, 2018 3:27 pm, edited 1 time in total.

NightFall
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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by NightFall » Thu Sep 27, 2018 7:15 am

Sounds like momentum investing. It relies on the assumption that past performance predicts future returns. In this case, past has a short definition.

gotester2000
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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by gotester2000 » Thu Sep 27, 2018 7:27 am

The strategy is right - but you need patience to use it year on year - i.e. keep on watching the market every day.
Maybe you can write a script that tells the entry point and exit point and automate it or buy a commercial software that does it.
The other way is invest normally and add more when index nosedives.

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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by nisiprius » Thu Sep 27, 2018 7:29 am

Would you consider editing your thread title (just click on the pencil link in the posting and change the subject line) to read "Why don't I read about this strategy more? It seems to have beaten everything else?"
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Lauretta
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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by Lauretta » Thu Sep 27, 2018 7:45 am

Dink2018 wrote:
Thu Sep 27, 2018 12:20 am
I don't believe I can predict the future at all, but I know for sure I can tell which way a line is going on a graph over a period of time. The key distinction here is that I want to react based on what HAPPENED, not what someone else or myself THINKS might happen.
When you are using this strategy you are really predicting the future because you are assuming that what has happened (e.g. in the last 12 months) will continue to happen. That's really a prediction, because there's no reason why a trend should continue (in fact many times it doesn't, which causes whipsaw losses).
You also have to take into account taxes and bid ask spreads, though the latter are minimal now.
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JoMoney
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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by JoMoney » Thu Sep 27, 2018 7:58 am

Dink2018 wrote:
Thu Sep 27, 2018 12:20 am
...

Why not simply buy an index (like S&P500) when the 12 month moving average is flat or going up, and sell when it is going down. I don't believe I can predict the future at all, but I know for sure I can tell which way a line is going on a graph over a period of time. The key distinction here is that I want to react based on what HAPPENED, not what someone else or myself THINKS might happen. The past is very easy to see and quite easy to quantify, the future not so much.

What am I missing here, this seems far too obvious for other people far smarter than me to not have noticed. After 2k posts and several books I'm wondering why I don't see more examples of this.

Is there anyone I could hire to run scenarios for me? EG:
...
https://www.portfoliovisualizer.com/tes ... ming-model
(You'll have to supply your own data if you want to go pre-1970)
Image
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

onourway
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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by onourway » Thu Sep 27, 2018 8:00 am

In your reading I presume you've come across evidence about how much impact being in the market for the very few extra-ordinarily good days has on overall investment performance.

How does your strategy look if you miss the 1, 3, 5, 10, etc. best days of the past decade or three?

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nisiprius
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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by nisiprius » Thu Sep 27, 2018 8:07 am

If you don't mind general remarks... many of us, including me, have gone through a phase of trying to find strategies like this...

1) Because of the extreme variability of financial data, averages, even long-term averages, don't "settle down" the way we expect. Even something as basic as "the historic return of the stock market," over periods of 70-80 years, comes out anywhere from 9% to 11% depending on what endpoints we pick, see this thread. What this means is that it is very easy to find seemingly "big" differences in performance that go away or reverse if you just move the endpoints a bit.

2) We all do "unconscious data mining." When we are looking for a strategy, we invent ideas. Many of them we don't even test formally--we say "I wonder what would happen if..." and are able to reject the idea just by eyeballing it. We also read dozens of articles about other people who have looked for strategies, and they only published the ones that 'worked.' When we settle down for our "final" test, we are really testing the best of a hundred or more strategies. So if we say "there's only a 1% chance that what I'm seeing could be luck"--it could well be luck.

3) The really poisonous thing about strategies is "making improvements," especially in response to fresh data. With market timing ideas, what often happens is that the first idea you come up with really looks promising, if only it hadn't been spoiled by one really unlikely thing that surely would never happen again. Perhaps you needed to have a signal fire, and it almost fired, but it didn't because you specified that it would fire if the market dropped 5% in three days and it only dropped 4.99%. So, what do you do? You adjust the threshold. And you add extra rules. And before you know it, you are guilty of "overfitting." You've built a custom set of rules that form-fit the specific past history of a market. You end up making rules that says "Go to cash whenever the month is September, the digits of the year add up to 21, and the President's name has both double initials and a double letter in his last name."

An interesting real-world test was provided by the popularity of "tactical asset allocation funds," very popular in the 1980s and 1990s. These were balanced funds that attempted to beat a fixed 60/40 allocation by adjusting stock and bond allocations, above and below a 60/40 "neutral point," based on market valuations and quantitative models and so forth. They were very mainstream for a while, there was one in my employer's 401(k) plan ("Fidelity Asset Manager") and Vanguard used tactical asset allocation in its all-in-one LifeStrategy funds for, I think, about two decades. This is gentle market timing, performed by professionals, using millions if not billions of real dollars, with a ton of analytical resources behind them. The results were so unimpressive that they have pretty well quietly fallen by the wayside.

In other words, as people like to say, "market timing is difficult." That's a polite way of saying "I personally think it's impossible, but I'll keep an open mind about it." It looks very easy, it really does. And it is easy to find promising ideas that seem to work. And, of course, you will find hundreds of books and newsletters and articles written by gurus saying that it's possible and they know how to do it.
Last edited by nisiprius on Thu Sep 27, 2018 8:40 am, edited 2 times in total.
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Carlos Danger
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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by Carlos Danger » Thu Sep 27, 2018 8:17 am

JoMoney wrote:
Thu Sep 27, 2018 7:58 am
Dink2018 wrote:
Thu Sep 27, 2018 12:20 am
...

Why not simply buy an index (like S&P500) when the 12 month moving average is flat or going up, and sell when it is going down. I don't believe I can predict the future at all, but I know for sure I can tell which way a line is going on a graph over a period of time. The key distinction here is that I want to react based on what HAPPENED, not what someone else or myself THINKS might happen. The past is very easy to see and quite easy to quantify, the future not so much.

What am I missing here, this seems far too obvious for other people far smarter than me to not have noticed. After 2k posts and several books I'm wondering why I don't see more examples of this.

Is there anyone I could hire to run scenarios for me? EG:
...
https://www.portfoliovisualizer.com/tes ... ming-model
(You'll have to supply your own data if you want to go pre-1970)
Image

This image perfectly demostrates the problem with these "simple" timing and momentum strategies. The max drawdown is MUCH lower. Yet so is the ultimate return.

Getting out in time to miss most of the decline is simple. Getting back in at the right time to not miss out on too much of the rebound is the tricky part.

I've backtested a few strategies myself using U3 vs. it's moving average of different durations, CFNAI, and the S&P vs. it's moving average of different durations. Turns out there a a few ways I could have easily gotten out of dodge at a great time before the Great Recession Bear Market and the Dot-com bust bear market! Knowing when the bottom has truly hit and knowing when to jump back in? Problematic.

Not to mention the EXTREMELY small sample size if you could actually come up with a system that when backtested works to also get back in on time. So it worked for a handful of bear markets, so what? Every bear market in US history if you could somehow obtain accurate and detailed enough data doesn't give you a large enough sample size to be meaningful.

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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by AlohaJoe » Thu Sep 27, 2018 8:32 am

I see tons of books and articles about strategies like these. If you haven't seen any of them at all...you need to look harder.

Dual Momentum Investing by Antonacci
Quantitative Momentum by Gray
Market Timing by Moving Averages by Zakamulin

Corey Hoffstein blogs about it all the time.

And Bogleheads had an epic 1,000+ post thread on it: viewtopic.php?t=27460

What more do you want?

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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by protagonist » Thu Sep 27, 2018 8:35 am

JoMoney wrote:
Thu Sep 27, 2018 7:58 am
Dink2018 wrote:
Thu Sep 27, 2018 12:20 am
...

Why not simply buy an index (like S&P500) when the 12 month moving average is flat or going up, and sell when it is going down. I don't believe I can predict the future at all, but I know for sure I can tell which way a line is going on a graph over a period of time. The key distinction here is that I want to react based on what HAPPENED, not what someone else or myself THINKS might happen. The past is very easy to see and quite easy to quantify, the future not so much.

What am I missing here, this seems far too obvious for other people far smarter than me to not have noticed. After 2k posts and several books I'm wondering why I don't see more examples of this.

Is there anyone I could hire to run scenarios for me? EG:
...
https://www.portfoliovisualizer.com/tes ... ming-model
(You'll have to supply your own data if you want to go pre-1970)
Image
Looking at the results, the timing portfolio slightly underperformed, but with a better "worst year" and a worse "best year". The standard deviation is 2/3 that of the buy and hold portfolio.
Perhaps this just reflects the old adage that risk is proportional to reward? Maybe it underperformed because it mitigated risk?

I'm happy with buy and hold. It might not be the best strategy, but since I don't know what is, at least it is easy and I don't lose sleep at night.

I don't believe that past performance likely predicts future performance. But if I am wrong and it does, I am still willing to sacrifice 0.2-0.3%/year for the luxury of being able to spend my evenings doing something besides reading the WSJ.

Besides which, even if you do believe that the past is predictive of the future, 87 years of data is nothing, if you are trying to predict 20, 30 or 50 years into the future.
Last edited by protagonist on Thu Sep 27, 2018 8:42 am, edited 2 times in total.

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bertilak
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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by bertilak » Thu Sep 27, 2018 8:36 am

Dink2018 wrote:
Thu Sep 27, 2018 12:20 am
Hello Everyone, first time post but I've been reading for about a year. ... for sure I can tell which way a line is going on a graph over a period of time.
Actually, what you can see is which way the line WAS going. You seem to understand that, based on what you continue on to say ...
The key distinction here is that I want to react based on what HAPPENED, not what someone else or myself THINKS might happen. The past is very easy to see and quite easy to quantify, the future not so much.
But it is the future that matters. Driving a car by what you can see in the rear-view mirror is quite dangerous.
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JoMoney
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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by JoMoney » Thu Sep 27, 2018 8:45 am

protagonist wrote:
Thu Sep 27, 2018 8:35 am
...

Looking at the results, the timing portfolio slightly underperformed, but with a better "worst year" and a worse "best year". The standard deviation is 2/3 that of the buy and hold portfolio.
Perhaps this just reflects the old adage that risk is proportional to reward? Maybe it underperformed because it mitigated risk?...
It's hard to tell from the picture, but what I found interesting, is that the timing portfolio spent about 80% of the time in stocks anyway, and most of the gains that kept it competitive were from a couple rare events: the great depression, the mid-1970s, the dot-com bust, and 2008. The "broken clock" was right those times... but you could find yourself getting whip-sawed around and trailing the market the rest of the time.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

betablocker
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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by betablocker » Thu Sep 27, 2018 8:59 am

My guess is that using the 3 fund portfolio isn't the best option for momentum. AQR does it with individual stocks, currencies, bonds, commodities, etc. You look for the things that have the best momentum overall (cross sectional) and those with the best momentum against themselves (time series/trend). If you do it that way you have gotten a huge outperformance. The downside is momentum crashes happen so many recommend running momentum with a value portfolio which tends to do well when momentum doesn't. You could do all that yourself or you could just buy alpha architect's VMOT and AQR funds like QSPIX.

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Lauretta
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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by Lauretta » Thu Sep 27, 2018 9:06 am

AlohaJoe wrote:
Thu Sep 27, 2018 8:32 am
I see tons of books and articles about strategies like these. If you haven't seen any of them at all...you need to look harder.

Dual Momentum Investing by Antonacci
Quantitative Momentum by Gray
Market Timing by Moving Averages by Zakamulin

Corey Hoffstein blogs about it all the time.

Actually, Quantitative momentum is about individual stock selection not about timing the market using trend following or time-series-momentum. However in their blog AlphaArchitect do have a lot of articles on market timing.
I have corresponded with all people you mention except Hoffstein. It's interesting that, with the exception of Antonacci, they are not at all confident that trend following can beat the market. They consider it more as a way to protect you from large drawdowns.
Antonacci does present Dual momentum as a way to outperform. But then, he has a book and a proprietary model to sell...
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Alexa9
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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by Alexa9 » Thu Sep 27, 2018 9:21 am

No way to consistently predict when it will zig or zag. Stressful and a waste of time, likely to make mistakes. The long term trend is upwards so it’s best to just rebalance during big swings.

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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by staythecourse » Thu Sep 27, 2018 9:34 am

moving averages were made REALLY popular by Mebane Farber on his "Ivy League" book. Based on that fame he started his own mutual fund. Think it was ?GTAA or something like that. How did it do? Who knows as it closed down and is no longer in existence. So a real life IN VITRO experiment showed it is NOT that easy to do. Mind you HE ran the fund and was actively managed so you can bet he/ computer watched the market on a nano second time period and it didn't help him.

All I can say is the ONLY strategy I have seen work IN VITRO for the masses with a HIGH probability of repeating is the bogleheads approach. Nothing comes close. Trust me I wish it did. I love the idea of outsmarting everyone else, but am resigned to to passive investing as it has the HIGHEST probability of success over a 50 year lifespan.

Good luck.
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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by drk » Thu Sep 27, 2018 9:37 am

Dink2018 wrote:
Thu Sep 27, 2018 12:20 am
What I can't get my head around is why I don't read more about using a 12 month moving average to signal buy and sell conditions relative to an index.
You must not be reading enough because willthrill talks about trend-following on here all the time. :D

Why don't others pick it up? Well, it's more work, not in keeping with investing with simplicity. It also has higher costs, both in terms of transactions and taxes.

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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by wolf359 » Thu Sep 27, 2018 9:41 am

Dink2018 wrote:
Thu Sep 27, 2018 12:20 am

Is there anyone I could hire to run scenarios for me? EG:

$1k a week DCA with 100% into VOO if trend line is flat or upward then 100% to BND when trend line heads down for 3 months
$1k a week DCA with 80% VOO and 20% BND when trend line is flat or upward then switch to 20% VOO and 80% BND

Longest time periods possible...
Check out https://www.portfoliovisualizer.com/ It's a free resource. One of the options you can try is timing models, including using moving averages.

This is a very old strategy. I remember subscribing to the "Telephone Switch Newsletter" (Richard Fabian) in the 80's. The concept was that you follow the moving averages, then use your telephone to call into the automated system to switch between stocks and bonds.

There are much more sophisticated systems including weighted moving averages, or getting confirmation using long and short averages.

It works well in some markets, but not in others. Mechanical systems can work well, but not if everybody uses it.

I'm aware of someone who splits their portfolio and contributions in half. Half their money went into a market timing system using moving averages. Half is buy and hold. It doesn't matter which technique wins if you meet your goals.

Keep it simple. Buy-and-hold works.

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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by Lauretta » Thu Sep 27, 2018 11:25 am

wolf359 wrote:
Thu Sep 27, 2018 9:41 am


This is a very old strategy. I remember subscribing to the "Telephone Switch Newsletter" (Richard Fabian) in the 80's. The concept was that you follow the moving averages, then use your telephone to call into the automated system to switch between stocks and bonds.
May I ask why you stopped using this system? Trend following is something I had considered myself initially (to limit drawdowns) but then I was partly dissuaded by Jonathan Clement's advice and above all I don't think it agrees with my temperament, so I didn't do it. But I would be interested to hear whether you implemented it for some time and if so why you gave it up. Was it because of whipsaw losses when the market goes sideways?
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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by betablocker » Thu Sep 27, 2018 12:49 pm

staythecourse wrote:
Thu Sep 27, 2018 9:34 am
moving averages were made REALLY popular by Mebane Farber on his "Ivy League" book. Based on that fame he started his own mutual fund. Think it was ?GTAA or something like that. How did it do? Who knows as it closed down and is no longer in existence. So a real life IN VITRO experiment showed it is NOT that easy to do. Mind you HE ran the fund and was actively managed so you can bet he/ computer watched the market on a nano second time period and it didn't help him.

All I can say is the ONLY strategy I have seen work IN VITRO for the masses with a HIGH probability of repeating is the bogleheads approach. Nothing comes close. Trust me I wish it did. I love the idea of outsmarting everyone else, but am resigned to to passive investing as it has the HIGHEST probability of success over a 50 year lifespan.

Good luck.
Meb runs Cambria which has a a dozen ETFs some of which use trend following. Not sure about GTAA but don't think your statements above are true.

betablocker
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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by betablocker » Thu Sep 27, 2018 12:50 pm

In fact a simple Google search shows that he was a sub advisor on that fund and left to start a similar ETF which he still runs: https://www.etf.com/sections/daily-etf- ... -role.html

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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by willthrill81 » Thu Sep 27, 2018 12:54 pm

drk wrote:
Thu Sep 27, 2018 9:37 am
Dink2018 wrote:
Thu Sep 27, 2018 12:20 am
What I can't get my head around is why I don't read more about using a 12 month moving average to signal buy and sell conditions relative to an index.
You must not be reading enough because willthrill talks about trend-following on here all the time. :D

Why don't others pick it up? Well, it's more work, not in keeping with investing with simplicity. It also has higher costs, both in terms of transactions and taxes.
I'm flattered. 8-)

Buy-and-hold and trend following suffer from problems which are more or less in direct opposition to each other. The problems with buy-and-hold is the big drawdowns and potentially lengthy recoveries. The problems with trend following are its complexity (which is overblown by most Bogleheads IMHO) and the fact that there will certainly be periods of time where you lag buy-and-hold and the market in general (which is a problem shared with factor investing in general).

Based on the data I've seen, which coincides with the info provided above by JoMoney, a basic trend following strategy like 12 month moving average and buy-and-hold tend to produce very similar results over the long-term. Using JoMoney's graph, the difference in returns over an 88 year period was a mere 32 basis points. In return for giving up those 32 basis points, you got a much smoother ride, including an almost 40% smaller maximum drawdown, and a significantly better risk-adjusted return (i.e. higher Sharpe ratio). Over this same period, trend following was certainly a better risk-adjusted choice than using a mix of stocks and bonds with buy-and-hold.

But the real question is how strongly you believe that this, pardon the pun, 'trend' will continue. I believe that it will, but many others do not.
Last edited by willthrill81 on Thu Sep 27, 2018 12:56 pm, edited 1 time in total.
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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by willthrill81 » Thu Sep 27, 2018 12:55 pm

staythecourse wrote:
Thu Sep 27, 2018 9:34 am
moving averages were made REALLY popular by Mebane Farber on his "Ivy League" book.
Just to be clear for those that might not be aware of it, moving averages were in use by many decades before Meb Faber was even born.
“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: Why don't I read about this strategy more? It seems to beat everything else

Post by sillysaver » Thu Sep 27, 2018 12:57 pm

The biggest reason why this strategy won't work is the behavior gap. It's difficult to take the inevitable small losses when you get whipsawed, and psychologically difficult to be out of the market during the V-bottoms that mark the end of bear markets and the beginning of bull markets.

There are vehicles like ETF's that implement time-series momentum strategies. If you buy one, you will have to overcome tracking error regret as these funds underperform in sideways and bull markets.

Either way you have to be able to overcome your emotions and innate behavioral biases.

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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by delamer » Thu Sep 27, 2018 12:58 pm

Buying stocks when the prices are rising and selling them when the prices are falling?

How can that be a good strategy? (This is a rhetorical question.)

These types of theories always convince me of the advantages of picking an allocation, and doing annual rebalancing (where I get to buy low and sell high).
Last edited by delamer on Thu Sep 27, 2018 1:02 pm, edited 1 time in total.

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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by willthrill81 » Thu Sep 27, 2018 1:01 pm

delamer wrote:
Thu Sep 27, 2018 12:58 pm
Buying stocks when the prices are rising and selling them when the prices are falling?

How can that be a good strategy?
Look at JoMoney's graph. Your statement seems to imply that one is buying at the peak and selling at the trough. That's not at all what this strategy tends to do. Rather, the intended action is to sell before the trough and buy before the peak. Of course, it can't do so perfectly, and no one not selling something claims that it can. But it has reduced risk without a compensatory reduction in returns in the past.
“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: Why don't I read about this strategy more? It seems to beat everything else

Post by Carlos Danger » Thu Sep 27, 2018 1:08 pm

betablocker wrote:
Thu Sep 27, 2018 12:50 pm
In fact a simple Google search shows that he [Meb Faber]was a sub advisor on that fund and left to start a similar ETF which he still runs: https://www.etf.com/sections/daily-etf- ... -role.html

Image


Unfair comparison of course. . . . for VT, which is only ~55% U.S. as opposed to GMOM which is ~ 70% U.S. equities.

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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by delamer » Thu Sep 27, 2018 1:09 pm

willthrill81 wrote:
Thu Sep 27, 2018 1:01 pm
delamer wrote:
Thu Sep 27, 2018 12:58 pm
Buying stocks when the prices are rising and selling them when the prices are falling?

How can that be a good strategy?
Look at JoMoney's graph. Your statement seems to imply that one is buying at the peak and selling at the trough. That's not at all what this strategy tends to do. Rather, the intended action is to sell before the trough and buy before the peak. Of course, it can't do so perfectly, and no one not selling something claims that it can. But it has reduced risk without a compensatory reduction in returns in the past.
The final balance on the buy-and-hold is 1/3 larger. You don’t think that compensates for the higher risk?

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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by willthrill81 » Thu Sep 27, 2018 1:16 pm

delamer wrote:
Thu Sep 27, 2018 1:09 pm
willthrill81 wrote:
Thu Sep 27, 2018 1:01 pm
delamer wrote:
Thu Sep 27, 2018 12:58 pm
Buying stocks when the prices are rising and selling them when the prices are falling?

How can that be a good strategy?
Look at JoMoney's graph. Your statement seems to imply that one is buying at the peak and selling at the trough. That's not at all what this strategy tends to do. Rather, the intended action is to sell before the trough and buy before the peak. Of course, it can't do so perfectly, and no one not selling something claims that it can. But it has reduced risk without a compensatory reduction in returns in the past.
The final balance on the buy-and-hold is 1/3 larger. You don’t think that compensates for the higher risk?
Do you plan on investing 100% in stocks for 88 years? The difference in returns was 32 basis points. The only reason that the final balance was 1/3 large for buy-and-hold was because of the incredibly long time horizon. And few Bogleheads will be 100% stocks forever.
“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: Why don't I read about this strategy more? It seems to beat everything else

Post by randomguy » Thu Sep 27, 2018 2:09 pm

onourway wrote:
Thu Sep 27, 2018 8:00 am
In your reading I presume you've come across evidence about how much impact being in the market for the very few extra-ordinarily good days has on overall investment performance.

How does your strategy look if you miss the 1, 3, 5, 10, etc. best days of the past decade or three?
Have you seen the evidence on how much impact not being in the market for the few extra-ordinary bad days has had on overall performance? Being in the market on 10/13/2008 and making 10% was great. Being in on 10/9/2008 (-7%) and 10/15/2008(- 8%) not so much:) On average I would expect this to more or less work out (you miss a dozen good days and a dozen bad ones) but slight changes (i.e. you scheme catches and extra good day or two) can definitely change results and you can end up debating if you want an 88 day moving average or a 91:)

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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by nisiprius » Thu Sep 27, 2018 2:31 pm

staythecourse wrote:
Thu Sep 27, 2018 9:34 am
...moving averages were made REALLY popular by Mebane [Faber] [in] his "Ivy [Portfolio]" book. Based on that fame he started his own mutual fund. Think it was ?GTAA or something like that.
It was indeed GTAA.
...How did it do? Who knows as it closed down and is no longer in existence. So a real life IN VITRO experiment showed it is NOT that easy to do. Mind you HE ran the fund and was actively managed so you can bet he/ computer watched the market on a nano second time period and it didn't help him...
Fortunately, I made a snarky post about it back when it still existed. Here's how it did during the period when he was managing it:

Image

Notice that I compared it with VSCGX, the Vanguard LifeStrategy Conservative Growth fund--i.e. pretty much a Taylor Larimore three-fund portfolio, 40/60 and including international stocks.
Last edited by nisiprius on Thu Sep 27, 2018 2:58 pm, edited 1 time in total.
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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by delamer » Thu Sep 27, 2018 2:51 pm

willthrill81 wrote:
Thu Sep 27, 2018 1:16 pm
delamer wrote:
Thu Sep 27, 2018 1:09 pm
willthrill81 wrote:
Thu Sep 27, 2018 1:01 pm
delamer wrote:
Thu Sep 27, 2018 12:58 pm
Buying stocks when the prices are rising and selling them when the prices are falling?

How can that be a good strategy?
Look at JoMoney's graph. Your statement seems to imply that one is buying at the peak and selling at the trough. That's not at all what this strategy tends to do. Rather, the intended action is to sell before the trough and buy before the peak. Of course, it can't do so perfectly, and no one not selling something claims that it can. But it has reduced risk without a compensatory reduction in returns in the past.
The final balance on the buy-and-hold is 1/3 larger. You don’t think that compensates for the higher risk?
Do you plan on investing 100% in stocks for 88 years? The difference in returns was 32 basis points. The only reason that the final balance was 1/3 large for buy-and-hold was because of the incredibly long time horizon. And few Bogleheads will be 100% stocks forever.
The difference in the ANNUAL return was 32 basis points. So of course the more years that you compound that difference, the bigger the gap.

The OP was talking about using this method as a substitute for the Boglehead 3-fund portfolio, and was asking for opinions as to whether it is a good alternative. One reason it is not is because, as you state, people shouldn’t/wouldn’t be 100% stocks forever.

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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by FactualFran » Thu Sep 27, 2018 3:06 pm

Dink2018 wrote:
Thu Sep 27, 2018 12:20 am
Why not simply buy an index (like S&P500) when the 12 month moving average is flat or going up, and sell when it is going down. I don't believe I can predict the future at all, but I know for sure I can tell which way a line is going on a graph over a period of time. The key distinction here is that I want to react based on what HAPPENED, not what someone else or myself THINKS might happen. The past is very easy to see and quite easy to quantify, the future not so much.
One analysis of that approach, but using a moving average over 10 months instead of 12 month because 10 month had a slightly better result, is in Trend following in financial markets: A comprehensive backtest.

According the article: "The strategy [trading S&P 500 on 10 month moving average signals] has a switching win rate of around 25%, indicating that the majority of the switches-75%-are unnecessary and harmful to returns. But, as the table confirms, the winners tend to be much bigger than the losers, by enough to offset them in the final analysis."

Likely, whether a few winning trades offset many losing trades depends on the period used. A sequence of many losing trades could cause someone to stop using the method. A winning trade that would offset the losing trades would have been missed.

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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by willthrill81 » Thu Sep 27, 2018 3:31 pm

randomguy wrote:
Thu Sep 27, 2018 2:09 pm
onourway wrote:
Thu Sep 27, 2018 8:00 am
In your reading I presume you've come across evidence about how much impact being in the market for the very few extra-ordinarily good days has on overall investment performance.

How does your strategy look if you miss the 1, 3, 5, 10, etc. best days of the past decade or three?
Have you seen the evidence on how much impact not being in the market for the few extra-ordinary bad days has had on overall performance? Being in the market on 10/13/2008 and making 10% was great. Being in on 10/9/2008 (-7%) and 10/15/2008(- 8%) not so much:) On average I would expect this to more or less work out (you miss a dozen good days and a dozen bad ones) but slight changes (i.e. you scheme catches and extra good day or two) can definitely change results and you can end up debating if you want an 88 day moving average or a 91:)
Yes, people too often frame the question in terms of "missing the best days," when the better questions are (1) what are the long-term returns and (2) what is the risk-adjusted profile of the strategy. As the name implies, volatility clustering, whereby the most volatile days, both up and down, tend to group together, is very real. Most trend following strategies implicitly attempt to avoid this volatility. For instance, the market has been significantly more volatile when it has been trading below its 200 day moving average than when it has been trading above it.

Surprisingly, over long-term periods, the precise length of the timing period being used doesn't have as much of an impact as many believe. That's partly why many trend followers, myself included, use a monthly moving average rather than a daily moving average because it's less work. In work that Meb Faber did back in 2007, he found that timing periods ranging from 3 months to well over a year had similar, though certainly not identical, long-term results.
“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: Why don't I read about this strategy more? It seems to beat everything else

Post by willthrill81 » Thu Sep 27, 2018 3:35 pm

FactualFran wrote:
Thu Sep 27, 2018 3:06 pm
Likely, whether a few winning trades offset many losing trades depends on the period used. A sequence of many losing trades could cause someone to stop using the method. A winning trade that would offset the losing trades would have been missed.
Whipsaws are in inevitable outcome of any timing strategy. In the same vein, deep drawdowns are an inevitable outcome of buy-and-hold. Investors should do their best to determine which strategy and its associated pros and cons is a better fit for them. Timing can reduce drawdowns, but it's hard to lag the market for a decade or more as well. Again, these same issues are also present with those who practice factor investing (e.g. growth has been beating value for many years now).
“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: Why don't I read about this strategy more? It seems to beat everything else

Post by staythecourse » Thu Sep 27, 2018 5:17 pm

betablocker wrote:
Thu Sep 27, 2018 12:49 pm
staythecourse wrote:
Thu Sep 27, 2018 9:34 am
moving averages were made REALLY popular by Mebane Farber on his "Ivy League" book. Based on that fame he started his own mutual fund. Think it was ?GTAA or something like that. How did it do? Who knows as it closed down and is no longer in existence. So a real life IN VITRO experiment showed it is NOT that easy to do. Mind you HE ran the fund and was actively managed so you can bet he/ computer watched the market on a nano second time period and it didn't help him.

All I can say is the ONLY strategy I have seen work IN VITRO for the masses with a HIGH probability of repeating is the bogleheads approach. Nothing comes close. Trust me I wish it did. I love the idea of outsmarting everyone else, but am resigned to to passive investing as it has the HIGHEST probability of success over a 50 year lifespan.

Good luck.
Meb runs Cambria which has a a dozen ETFs some of which use trend following. Not sure about GTAA but don't think your statements above are true.
Welcome to active management tricks. It was Mebane Farber starting it with GTAA. Trust me I have a good memory. It did lousy so he shut it down. Now he markets these Cambria funds. Look at how long they have been in business and you will start to understand. Guess what will happen if they do poorly? They will get shut down as well. Don't blame him if you have enough investors who just buy everything told to them then why change your spots.

Look at Nisi post above or just search this site alone about GTAA.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by staythecourse » Thu Sep 27, 2018 5:19 pm

willthrill81 wrote:
Thu Sep 27, 2018 12:55 pm
staythecourse wrote:
Thu Sep 27, 2018 9:34 am
moving averages were made REALLY popular by Mebane Farber on his "Ivy League" book.
Just to be clear for those that might not be aware of it, moving averages were in use by many decades before Meb Faber was even born.
Correct. Mr. Farber made them popular, but did NOT invent them.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by Watty » Thu Sep 27, 2018 5:25 pm

That strategy sounds sort of like like the old quote;
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it.

Will Rogers

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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by heyyou » Thu Sep 27, 2018 6:14 pm

Go ahead and try the new method. I will just stay with what has worked well enough during my period of exposure to stock returns. Early on, I was seeking more returns and was less successful than just buy & hold with some rebalancing. Good luck to you on finding what is better than the plain old way.

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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by whodidntante » Thu Sep 27, 2018 6:53 pm

Trend following is helpful to reduce maximum drawdowns but may not outperform on a choose your own adventure timeframe. Then again, it might outperform in a big way. If I were to apply it I would eliminate my fixed income allocation to compensate. But it's not really an option for me because I would get a terrible tax bill following the first downtrend.

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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by Tamales » Thu Sep 27, 2018 7:01 pm

Some may remember a poster named "TorturedRegret" who implemented a similar trendline triggered strategy and was planning to post all his trades on the forum.
Here's the thread:
viewtopic.php?f=10&t=173980
He went a bit further and shorted when the exit trigger was activated.
Anyway, didn't work out so well, and hasn't posted in years.

The problem with all these things is there are infinite ways to mathematically define a calculation for a trendline and associated window size and trigger conditions and portfolio actions thereof, some simple, some complex, but no clearly correct answer that consistently beats buy and hold (or at least none that anyone wants to disclose).

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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by sambb » Thu Sep 27, 2018 7:19 pm

To the OP - the system might work. Good luck. You might be right.
Some of us here, are just trying to get the average return over a long period of time. You may be shooting for a higher type of return.

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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by willthrill81 » Thu Sep 27, 2018 9:36 pm

whodidntante wrote:
Thu Sep 27, 2018 6:53 pm
Trend following is helpful to reduce maximum drawdowns but may not outperform on a choose your own adventure timeframe. Then again, it might outperform in a big way. If I were to apply it I would eliminate my fixed income allocation to compensate. But it's not really an option for me because I would get a terrible tax bill following the first downtrend.
Actually, you can achieve a zero stock position without selling anything by using futures contracts.
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.
https://www.philosophicaleconomics.com/ ... ngaverage/
“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: Why don't I read about this strategy more? It seems to beat everything else

Post by whodidntante » Thu Sep 27, 2018 10:11 pm

willthrill81 wrote:
Thu Sep 27, 2018 9:36 pm
whodidntante wrote:
Thu Sep 27, 2018 6:53 pm
Trend following is helpful to reduce maximum drawdowns but may not outperform on a choose your own adventure timeframe. Then again, it might outperform in a big way. If I were to apply it I would eliminate my fixed income allocation to compensate. But it's not really an option for me because I would get a terrible tax bill following the first downtrend.
Actually, you can achieve a zero stock position without selling anything by using futures contracts.
True.

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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by onourway » Fri Sep 28, 2018 4:55 am

It appears that despite being popular fodder for the investing press for well over 30 years, there isn't a single successful fund following this strategy.

That should give anyone thinking of attempting this on their own pause...

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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by NoRegret » Fri Sep 28, 2018 1:47 pm

OP,

You can try it with leverage on buy signal :happy I'm only half tongue in cheek.

I've long advocated that if the benchmark is buy-and-hold, then the timing strategy needs to be leveraged on buy signal so as to have the same time-averaged exposure for a fair comparison.

Here's a link to Charlie Bilello's 2016 Dow award winning paper: leverage for the long run
https://papers.ssrn.com/sol3/papers.cfm ... id=2741701

A shorter version:
https://pensionpartners.com/leverage-for-the-long-run/

Good luck,
NR
Market timer targeting long term cycles -- aiming for several key decisions per asset class per decade

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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by unclescrooge » Fri Sep 28, 2018 2:04 pm

onourway wrote:
Fri Sep 28, 2018 4:55 am
It appears that despite being popular fodder for the investing press for well over 30 years, there isn't a single successful fund following this strategy.

That should give anyone thinking of attempting this on their own pause...
There was, as previously mentioned, GTAA.

Also, there's this in recent article about how this indicator no longer works.
barrons: https://www.barrons.com/articles/a-vene ... 1537963201

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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by betablocker » Fri Sep 28, 2018 2:31 pm

nisiprius wrote:
Thu Sep 27, 2018 2:31 pm
staythecourse wrote:
Thu Sep 27, 2018 9:34 am
...moving averages were made REALLY popular by Mebane [Faber] [in] his "Ivy [Portfolio]" book. Based on that fame he started his own mutual fund. Think it was ?GTAA or something like that.
It was indeed GTAA.
...How did it do? Who knows as it closed down and is no longer in existence. So a real life IN VITRO experiment showed it is NOT that easy to do. Mind you HE ran the fund and was actively managed so you can bet he/ computer watched the market on a nano second time period and it didn't help him...
Fortunately, I made a snarky post about it back when it still existed. Here's how it did during the period when he was managing it:

Image

Notice that I compared it with VSCGX, the Vanguard LifeStrategy Conservative Growth fund--i.e. pretty much a Taylor Larimore three-fund portfolio, 40/60 and including international stocks.
If I showed you three year underperformance of any fund would you then agree to sell it? I'm not defending this fund. I don't own it nor do I own any Cambria funds. I just disagree with cherry picking stuff and using it as proof.

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Re: Why don't I read about this strategy more? It seems to beat everything else

Post by betablocker » Fri Sep 28, 2018 2:34 pm

Carlos Danger wrote:
Thu Sep 27, 2018 1:08 pm
betablocker wrote:
Thu Sep 27, 2018 12:50 pm
In fact a simple Google search shows that he [Meb Faber]was a sub advisor on that fund and left to start a similar ETF which he still runs: https://www.etf.com/sections/daily-etf- ... -role.html

Image


Unfair comparison of course. . . . for VT, which is only ~55% U.S. as opposed to GMOM which is ~ 70% U.S. equities.
I guess there's no evidence that trend following works. Thanks for informing me.

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