My trend following strategy and experience

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willthrill81
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Re: My trend following strategy and experience

Post by willthrill81 » Wed May 22, 2019 4:53 pm

Lee_WSP wrote:
Wed May 22, 2019 4:42 pm
willthrill81 wrote:
Wed May 22, 2019 4:25 pm
Recall that I only move out of stocks if both the UER is below its 12 MMA and stocks have had lower performance relative to bonds over the last 7 months. I know at the end of the month whether stocks are above or below that threshold. If they are above it, I make trades according to the second part of my strategy (i.e. move into those classes with the highest relative performance over the prior 7 months). If they are below it, I wait until the UER data are released to determine whether to remain in stocks or not.
Follow up question then, if you will.

So what would the rule be if during those 1-7 days the stocks moved from below the 12MMA to just slightly above the 12MMA? If any question, stay in stocks as that is the bias stated in the strategy?
Remember that I'm only using monthly data, not daily data, to evaluate market trends. So waiting the 1-7 days on UER data wouldn't change the 7 MMA used for stocks.
Lee_WSP wrote:
Wed May 22, 2019 4:42 pm
Responding to the comment above regarding the strategy overall - You're not necessarily comparing this trend following to a B&H 100% stocks right? Your alternative strategy would have been X% stock & Y% bonds yes? Say 60/40 or 80/20? If so, I think it's unfair for us/them to compare the trend strategy to a 100% stock B&H strategy.
The most appropriate fixed AA to compare a trend following strategy to seems to be one that is set according to how much of the time the TF strategy was in/out of stocks. Historically, my strategy was in stocks about 85% of the time, so it would seem most logical to compare its long-term performance with an 85/15 strategy. But the question then becomes which stocks should be in that 85% (e.g. 50% U.S. / 50% international?). If you used a 50% U.S. / 50% international allocation, then my strategy would certainly look better over the last decade, for instance, than treating the 85% as all U.S. stock, due to the outperformance of U.S. over international over that period.
“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: My trend following strategy and experience

Post by Lee_WSP » Wed May 22, 2019 5:00 pm

willthrill81 wrote:
Wed May 22, 2019 4:53 pm
Lee_WSP wrote:
Wed May 22, 2019 4:42 pm
willthrill81 wrote:
Wed May 22, 2019 4:25 pm
Recall that I only move out of stocks if both the UER is below its 12 MMA and stocks have had lower performance relative to bonds over the last 7 months. I know at the end of the month whether stocks are above or below that threshold. If they are above it, I make trades according to the second part of my strategy (i.e. move into those classes with the highest relative performance over the prior 7 months). If they are below it, I wait until the UER data are released to determine whether to remain in stocks or not.
Follow up question then, if you will.

So what would the rule be if during those 1-7 days the stocks moved from below the 12MMA to just slightly above the 12MMA? If any question, stay in stocks as that is the bias stated in the strategy?
Remember that I'm only using monthly data, not daily data, to evaluate market trends. So waiting the 1-7 days on UER data wouldn't change the 7 MMA used for stocks.
Okay, I missed or glossed over that part on how the crossover point is calculated, can you point me to the post where it is detailed? In other words, to follow your trend following, we look at the average of the last month and then compare that to the 7mma?

So for example, at the end of this month, we take all the trading days in May, add up the closing prices, divide by the number of trading days, and then compare that number to the 7mma to see whether the signal is flashing sell or not? Then if it is flashing sell, we wait for the UE crossover signal to confirm or relax?

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willthrill81
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Re: My trend following strategy and experience

Post by willthrill81 » Wed May 22, 2019 5:06 pm

Lee_WSP wrote:
Wed May 22, 2019 5:00 pm
willthrill81 wrote:
Wed May 22, 2019 4:53 pm
Lee_WSP wrote:
Wed May 22, 2019 4:42 pm
willthrill81 wrote:
Wed May 22, 2019 4:25 pm
Recall that I only move out of stocks if both the UER is below its 12 MMA and stocks have had lower performance relative to bonds over the last 7 months. I know at the end of the month whether stocks are above or below that threshold. If they are above it, I make trades according to the second part of my strategy (i.e. move into those classes with the highest relative performance over the prior 7 months). If they are below it, I wait until the UER data are released to determine whether to remain in stocks or not.
Follow up question then, if you will.

So what would the rule be if during those 1-7 days the stocks moved from below the 12MMA to just slightly above the 12MMA? If any question, stay in stocks as that is the bias stated in the strategy?
Remember that I'm only using monthly data, not daily data, to evaluate market trends. So waiting the 1-7 days on UER data wouldn't change the 7 MMA used for stocks.
Okay, I missed or glossed over that part on how the crossover point is calculated, can you point me to the post where it is detailed? In other words, to follow your trend following, we look at the average of the last month and then compare that to the 7mma?
I use Portfolio Visualizer to do the analysis for me. It only looks at closing prices on the last trading day of each month.
“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: My trend following strategy and experience

Post by AerialWombat » Wed May 22, 2019 5:11 pm

Just wanted to say thanks for sharing your strategy and progress. Fascinating thread that allows me to live vicariously through your strategy while I bite my nails on mine. :)
“Life doesn’t come with a warranty.” -Michael LeBoeuf

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willthrill81
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Re: My trend following strategy and experience

Post by willthrill81 » Wed May 22, 2019 5:12 pm

AerialWombat wrote:
Wed May 22, 2019 5:11 pm
Just wanted to say thanks for sharing your strategy and progress. Fascinating thread that allows me to live vicariously through your strategy while I bite my nails on mine. :)
You're most welcome. If nothing else, this thread may serve as a warning to others to not go down my path. :)
“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

abc132
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Re: My trend following strategy and experience

Post by abc132 » Wed May 22, 2019 5:30 pm

Backtesting the strategy is as simple as time-averaging the performance of the things that were invested in, using the appropriate benchmarks.

300 days Total Stock Market
30 days Emerging Market
35 days cash

300/365 total stock market
30/365 emerging market
35/365 cash

The goal is to jump in and out of assets, and jump in and out of the market better than the market buy and hold. This weighting will compare that, as the times that someone is jumping into total stock market and emerging market need to beat someone that bought and held.

This would be done yearly, keeping a cumulative total through the years.

We likely won't be able to do this since the OP is not posting trades.

skeptic42
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Re: My trend following strategy and experience

Post by skeptic42 » Wed May 22, 2019 6:03 pm

willthrill81 wrote:
Wed May 22, 2019 4:29 pm
skeptic42 wrote:
Wed May 22, 2019 4:20 pm
willthrill81 wrote:
Wed May 22, 2019 1:16 pm
HomerJ wrote:
Wed May 22, 2019 1:10 pm
Will, what danger are you trying to protect yourself from? Behavioral mistakes, where a 50%-70% downturn will make you sell?

Or are you protecting yourself from the (tiny, but not-zero) possibility that the U.S. stock market will crash and not come back?
Yes and yes. Also, I would know that I would be very tempted to increase my stock allocation during long bull markets and decrease it during bear markets. There are strong behavioral risks with buy-and-hold. That's why so many here have to chant 'stay the course' like a mantra. It may be simple, but it's not easy.
I agree B&H is simple but not easy.
But aren't you exposed to the same behavioral mistakes with your trend following strategy?
Two fast 30%+ corrections with fast recoveries could let you sell at the bottoms and buy at the tops and you could experience a downturn of 50%+.
It's true that I must 'stay the course' with my strategy when it's underperforming BAH, but historically, the underperformance has occurred when both it and BAH are posting strong gains. I believe that it will be easier for me to stick with my strategy during such times than to stick with BAH during a -50% bear market.

Nothing resembling your example has occurred since WW2, so I'm not concerned about it, even though it's theoretically possible. My strategy is very 'long-biased', and whipsaws like the one I recently encountered have been relatively few in the historic record, although the future could certainly look different. Alternatively, I could just as easily suggest that a major risk for BAH is that stocks will go into a downward slump and not recover during your investment horizon. That's a real risk that many simply choose to ignore.
Actually, I think this is THE risk. There is no guarantee to get the projected return during one's investment horizon, that's why stocks are risky. But there is also no guaranteed -50% bear market around the corner. Nevertheless, I prefer to be prepared by holding some fixed income instead of timing the market with signals which could stop working in the future. :wink:

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willthrill81
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Re: My trend following strategy and experience

Post by willthrill81 » Wed May 22, 2019 6:10 pm

skeptic42 wrote:
Wed May 22, 2019 6:03 pm
willthrill81 wrote:
Wed May 22, 2019 4:29 pm
skeptic42 wrote:
Wed May 22, 2019 4:20 pm
willthrill81 wrote:
Wed May 22, 2019 1:16 pm
HomerJ wrote:
Wed May 22, 2019 1:10 pm
Will, what danger are you trying to protect yourself from? Behavioral mistakes, where a 50%-70% downturn will make you sell?

Or are you protecting yourself from the (tiny, but not-zero) possibility that the U.S. stock market will crash and not come back?
Yes and yes. Also, I would know that I would be very tempted to increase my stock allocation during long bull markets and decrease it during bear markets. There are strong behavioral risks with buy-and-hold. That's why so many here have to chant 'stay the course' like a mantra. It may be simple, but it's not easy.
I agree B&H is simple but not easy.
But aren't you exposed to the same behavioral mistakes with your trend following strategy?
Two fast 30%+ corrections with fast recoveries could let you sell at the bottoms and buy at the tops and you could experience a downturn of 50%+.
It's true that I must 'stay the course' with my strategy when it's underperforming BAH, but historically, the underperformance has occurred when both it and BAH are posting strong gains. I believe that it will be easier for me to stick with my strategy during such times than to stick with BAH during a -50% bear market.

Nothing resembling your example has occurred since WW2, so I'm not concerned about it, even though it's theoretically possible. My strategy is very 'long-biased', and whipsaws like the one I recently encountered have been relatively few in the historic record, although the future could certainly look different. Alternatively, I could just as easily suggest that a major risk for BAH is that stocks will go into a downward slump and not recover during your investment horizon. That's a real risk that many simply choose to ignore.
Actually, I think this is THE risk. There is no guarantee to get the projected return during one's investment horizon, that's why stocks are risky. But there is also no guaranteed -50% bear market around the corner. Nevertheless, I prefer to be prepared by holding some fixed income instead of timing the market with signals which could stop working in the future. :wink:
That's a fine strategy, and you won't find me knocking it, although I will readily point out the risks it and any other strategy face.

The specific scenario I described is not the only risk faced by BAH. Consider the 2000-2009 period, when U.S. stocks had annualized real returns of -1%. What if that was your last decade before retirement, and instead of getting roughly another doubling on your portfolio, it went the other way? Bonds certainly would have helped, but they certainly didn't counteract the two bear markets investors encountered. Also, what if that was your first decade of retirement? Yes, we know now that the '4% rule' would have worked (although we don't yet know with certainty that it will work the full 30 years for hypothetical year 2000 retirees), but it was a heck of a ride to nowhere good even for those with 50% stock allocations.

Sequence of returns risk is a bear, and it doesn't only impact retirees. Historically, TF has done a good job alleviating the brunt of its impact, although this might not be the case in the future.
“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: My trend following strategy and experience

Post by HomerJ » Wed May 22, 2019 6:17 pm

willthrill81 wrote:
Wed May 22, 2019 4:29 pm
Alternatively, I could just as easily suggest that a major risk for BAH is that stocks will go into a downward slump and not recover during your investment horizon. That's a real risk that many simply choose to ignore.
True enough...

I, for one, don't ignore it... I'm 50/50 because I realize it's possible, but my returns are very muted compared to yours because I'm so conservative.

The 50% in bonds protects me from both behavorial mistakes (because a normal crash doesn't hurt that much), and the tiny (but non-zero!) chance that the market could crash and take decades to recover (or never recover).

But my returns are almost certainly going to be much lower than your plan.

(Good thing I don't need great returns to retire in 3-5 years) :)
The J stands for Jay

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Re: My trend following strategy and experience

Post by willthrill81 » Wed May 22, 2019 6:20 pm

HomerJ wrote:
Wed May 22, 2019 6:17 pm
willthrill81 wrote:
Wed May 22, 2019 4:29 pm
Alternatively, I could just as easily suggest that a major risk for BAH is that stocks will go into a downward slump and not recover during your investment horizon. That's a real risk that many simply choose to ignore.
True enough...

I, for one, don't ignore it... I'm 50/50 because I realize it's possible, but my returns are very muted compared to yours because I'm so conservative.

The 50% in bonds protects me from both behavorial mistakes (because a normal crash doesn't hurt that much), and the tiny (but non-zero!) chance that the market could crash and take decades to recover (or never recover).

But my returns are almost certainly going to be much lower than your plan.

(Good thing I don't need great returns to retire in 3-5 years) :)
Many roads to Dublin indeed! :sharebeer
“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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HomerJ
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Re: My trend following strategy and experience

Post by HomerJ » Wed May 22, 2019 6:22 pm

willthrill81 wrote:
Wed May 22, 2019 6:10 pm
The specific scenario I described is not the only risk faced by BAH. Consider the 2000-2009 period, when U.S. stocks had annualized real returns of -1%. What if that was your last decade before retirement, and instead of getting roughly another doubling on your portfolio, it went the other way? Bonds certainly would have helped, but they certainly didn't counteract the two bear markets investors encountered. Also, what if that was your first decade of retirement? Yes, we know now that the '4% rule' would have worked (although we don't yet know with certainty that it will work the full 30 years for hypothetical year 2000 retirees), but it was a heck of a ride to nowhere good even for those with 50% stock allocations.

Sequence of returns risk is a bear, and it doesn't only impact retirees. Historically, TF has done a good job alleviating the brunt of its impact, although this might not be the case in the future.
The 2000-2009 for a person in their last decade before retirement wasn't too bad. Because they were still investing, and the money invested in 2001 and 2002 and 2003, etc. did fairly well.

I agree for the person who entered retirement in 2000, it was pretty hard.

But bonds did help, and a 50/50 portfolio wasn't hurt too bad. It was a scary ride, but not an impossible ride.
The J stands for Jay

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HomerJ
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Re: My trend following strategy and experience

Post by HomerJ » Wed May 22, 2019 6:25 pm

willthrill81 wrote:
Wed May 22, 2019 6:20 pm
HomerJ wrote:
Wed May 22, 2019 6:17 pm
willthrill81 wrote:
Wed May 22, 2019 4:29 pm
Alternatively, I could just as easily suggest that a major risk for BAH is that stocks will go into a downward slump and not recover during your investment horizon. That's a real risk that many simply choose to ignore.
True enough...

I, for one, don't ignore it... I'm 50/50 because I realize it's possible, but my returns are very muted compared to yours because I'm so conservative.

The 50% in bonds protects me from both behavorial mistakes (because a normal crash doesn't hurt that much), and the tiny (but non-zero!) chance that the market could crash and take decades to recover (or never recover).

But my returns are almost certainly going to be much lower than your plan.

(Good thing I don't need great returns to retire in 3-5 years) :)
Many roads to Dublin indeed! :sharebeer
Yes, your plan is indeed solid... I'm surprised you haven't "locked in some gains" yet. Being 100% stocks most of the past decade, you must be far ahead of where you'd thought you be at this point... If I was you (but I'm super conservative), I'd be putting at least 20% into safer assets, and moving from 80/20 to 20/80 during your trend following swings instead of 100/0 to 0/100.

But I'm a big wimp :)
The J stands for Jay

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willthrill81
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Re: My trend following strategy and experience

Post by willthrill81 » Wed May 22, 2019 6:28 pm

HomerJ wrote:
Wed May 22, 2019 6:22 pm
willthrill81 wrote:
Wed May 22, 2019 6:10 pm
The specific scenario I described is not the only risk faced by BAH. Consider the 2000-2009 period, when U.S. stocks had annualized real returns of -1%. What if that was your last decade before retirement, and instead of getting roughly another doubling on your portfolio, it went the other way? Bonds certainly would have helped, but they certainly didn't counteract the two bear markets investors encountered. Also, what if that was your first decade of retirement? Yes, we know now that the '4% rule' would have worked (although we don't yet know with certainty that it will work the full 30 years for hypothetical year 2000 retirees), but it was a heck of a ride to nowhere good even for those with 50% stock allocations.

Sequence of returns risk is a bear, and it doesn't only impact retirees. Historically, TF has done a good job alleviating the brunt of its impact, although this might not be the case in the future.
The 2000-2009 for a person in their last decade before retirement wasn't too bad. Because they were still investing, and the money invested in 2001 and 2002 and 2003, etc. did fairly well.

I agree for the person who entered retirement in 2000, it was pretty hard.

But bonds did help, and a 50/50 portfolio wasn't hurt too bad. It was a scary ride, but not an impossible ride.
Key to the 2000-2009 period not wrecking your retirement, either as an accumulator or a retiree, as a buy-and-hold investor was staying the course, and that was difficult for many here to do. I know for a fact that many folks caved and locked in significant losses. Some threw up their hands and swore off stocks forever. Buy-and-hold may be simple, but it's not always easy.
HomerJ wrote:
Wed May 22, 2019 6:25 pm
willthrill81 wrote:
Wed May 22, 2019 6:20 pm
HomerJ wrote:
Wed May 22, 2019 6:17 pm
willthrill81 wrote:
Wed May 22, 2019 4:29 pm
Alternatively, I could just as easily suggest that a major risk for BAH is that stocks will go into a downward slump and not recover during your investment horizon. That's a real risk that many simply choose to ignore.
True enough...

I, for one, don't ignore it... I'm 50/50 because I realize it's possible, but my returns are very muted compared to yours because I'm so conservative.

The 50% in bonds protects me from both behavorial mistakes (because a normal crash doesn't hurt that much), and the tiny (but non-zero!) chance that the market could crash and take decades to recover (or never recover).

But my returns are almost certainly going to be much lower than your plan.

(Good thing I don't need great returns to retire in 3-5 years) :)
Many roads to Dublin indeed! :sharebeer
Yes, your plan is indeed solid... I'm surprised you haven't "locked in some gains" yet. Being 100% stocks most of the past decade, you must be far ahead of where you'd thought you be at this point... If I was you (but I'm super conservative), I'd be putting at least 20% into safer assets, and moving from 80/20 to 20/80 during your trend following swings instead of 100/0 to 0/100.

But I'm a big wimp :)
Perhaps I'll do so when I get closer to retirement, but that's still ~17 years away.
“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

abc132
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Re: My trend following strategy and experience

Post by abc132 » Wed May 22, 2019 6:35 pm

willthrill81 wrote:
Wed May 22, 2019 6:10 pm
Sequence of returns risk is a bear, and it doesn't only impact retirees. Historically, TF has done a good job alleviating the brunt of its impact, although this might not be the case in the future.
The point being missed is that trend following can do worse in a less than stellar stock market. Comparing the last 1.5 years of returns shows this quite clearly. You are roughly 15% below the recent market. You have compounded the risk by trend following in the last 1.5 years.

You have the same risks as the general market, plus additional risks of under performance. The reasons are two-fold, jumping in and out of the market, and putting 100% of assets into one fund. You hope to mitigate these risks by trend-behavior, but you have no guarantee.

The method will need to justify those extra risks by outperforming during market downturns or by shifting through different funds, neither which has materialized so far. It's a poor start, under performing in each of these categories, but this is a long race, and there is no reason to judge by the very beginning.

These additional risks clearly exist, as shown by recent history.

You can't talk about the risks of the market as something separate when you are exposed to those same risks.

abc132
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Re: My trend following strategy and experience

Post by abc132 » Wed May 22, 2019 7:50 pm

Here is a thought experiment:

Person A market times and spends:
70% of their time in Total Stock Market (100% of assets)
10% of their time in Gold (100% of assets)
20% of their time in World (100% of assets)

Person B spends all of their time with the following assets:
70% Total Stock Market
10% Gold
20% World

Which person is more diversified?

I believe the answer is Person B.

If we talk risk vs reward, we would expect that Person A will need to outperform Person B to justify the additional risk of a less diversified portfolio. Jumping from one asset to another provides more potential ways to under perform and over perform the market, which is taking on additional risk.

If someone jumps in and out of total market, gold, and international in a way that reduces volatility, then the additional risk taken was rewarded with a reduction in volatility. The reduced volatility does not mean there is reduced risk.

Does it make sense for someone in their 30’s to take on additional risk to reduce volatility? Probably not, unless they can also capture some additional gains for taking on that risk. Volatility helps as much as it hurts during accumulation. It can be emotionally troublesome, but is not likely to affect your chances of a successful retirement in a meaningful way.

Does it make sense for someone in their 50’s to take on additional risk to reduce volatility? Probably not, because sequence of returns is just as deadly as volatility to a portfolio. It would generally be desirable to reduce risk and volatility, with something like bonds, even if that means lower performance.


Volatility is not risk.

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Forester
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Re: My trend following strategy and experience

Post by Forester » Thu May 23, 2019 12:21 am

abc132 wrote:
Wed May 22, 2019 7:50 pm
Here is a thought experiment:

Person A market times and spends:
70% of their time in Total Stock Market (100% of assets)
10% of their time in Gold (100% of assets)
20% of their time in World (100% of assets)

Person B spends all of their time with the following assets:
70% Total Stock Market
10% Gold
20% World

Which person is more diversified?

I believe the answer is Person B.

If we talk risk vs reward, we would expect that Person A will need to outperform Person B to justify the additional risk of a less diversified portfolio. Jumping from one asset to another provides more potential ways to under perform and over perform the market, which is taking on additional risk.

If someone jumps in and out of total market, gold, and international in a way that reduces volatility, then the additional risk taken was rewarded with a reduction in volatility. The reduced volatility does not mean there is reduced risk.

Does it make sense for someone in their 30’s to take on additional risk to reduce volatility? Probably not, unless they can also capture some additional gains for taking on that risk. Volatility helps as much as it hurts during accumulation. It can be emotionally troublesome, but is not likely to affect your chances of a successful retirement in a meaningful way.

Does it make sense for someone in their 50’s to take on additional risk to reduce volatility? Probably not, because sequence of returns is just as deadly as volatility to a portfolio. It would generally be desirable to reduce risk and volatility, with something like bonds, even if that means lower performance.


Volatility is not risk.
Person B would be even more diversified with 10% or 20% of their money using trend following :sharebeer

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Re: My trend following strategy and experience

Post by tadamsmar » Thu May 23, 2019 10:06 am

Global100 wrote:
Fri Jan 18, 2019 12:24 pm
Checking this strategy and the data for the bear market a decade ago: when would the numbers have indicated to sell out of U.S. stocks and when would they have indicated to buy them back?

EDITED: Looks like one of the required criteria indicated that late 2007 was time to sell equities and then buy them back in late 2009.

Image
The employment numbers alone never indicate sell or buy. When the spread is positive then he sells or buys based on the 7-month relative strength of funds available from each fiduciary; otherwise, he is in. But the way the relative strength is used in his specific system is complicated and idiosyncratic, different for each of his fiduciaries. It's systematic in the abstract, idiosyncratic as applied to the specific set of non-taxable investment options available from a specific fiduciary.
Last edited by tadamsmar on Thu May 23, 2019 10:51 pm, edited 6 times in total.

abc132
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Re: My trend following strategy and experience

Post by abc132 » Thu May 23, 2019 11:01 am

Forester wrote:
Thu May 23, 2019 12:21 am
abc132 wrote:
Wed May 22, 2019 7:50 pm
Here is a thought experiment:

Person A market times and spends:
70% of their time in Total Stock Market (100% of assets)
10% of their time in Gold (100% of assets)
20% of their time in World (100% of assets)

Person B spends all of their time with the following assets:
70% Total Stock Market
10% Gold
20% World

Which person is more diversified?

I believe the answer is Person B.

If we talk risk vs reward, we would expect that Person A will need to outperform Person B to justify the additional risk of a less diversified portfolio. Jumping from one asset to another provides more potential ways to under perform and over perform the market, which is taking on additional risk.

If someone jumps in and out of total market, gold, and international in a way that reduces volatility, then the additional risk taken was rewarded with a reduction in volatility. The reduced volatility does not mean there is reduced risk.

Does it make sense for someone in their 30’s to take on additional risk to reduce volatility? Probably not, unless they can also capture some additional gains for taking on that risk. Volatility helps as much as it hurts during accumulation. It can be emotionally troublesome, but is not likely to affect your chances of a successful retirement in a meaningful way.

Does it make sense for someone in their 50’s to take on additional risk to reduce volatility? Probably not, because sequence of returns is just as deadly as volatility to a portfolio. It would generally be desirable to reduce risk and volatility, with something like bonds, even if that means lower performance.


Volatility is not risk.
Person B would be even more diversified with 10% or 20% of their money using trend following :sharebeer
I'm not sure we agree on the word diversity.

Diversity is having multiple unlike assets, not pooling everything into one fund, or putting everything into cash.

A method that reduces diversity and performance in order to dampen volatility is reducing the things that create a strong retirement for the thing that does not matter much during accumulation.

Reducing diversity and performance would not be a good option near retirement either, as you would rather reduce risk along with volatility.

This is a riskier portfolio than buy and hold because it pools everything into one asset.


Imagine someone creating system so they can jump out of the market because they are scared they will jump out of the market. Does that really make sense as preventing what they were worried about? That's how this system is being sold.

This system makes sense if you are performance chasing, but it is far riskier than suggested.

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Re: My trend following strategy and experience

Post by willthrill81 » Thu May 23, 2019 11:26 am

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.
emphasis in original
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: My trend following strategy and experience

Post by abc132 » Thu May 23, 2019 11:39 am

willthrill81 wrote:
Thu May 23, 2019 11:26 am
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.
emphasis in original
https://www.philosophicaleconomics.com/ ... ngaverage/
These are not the same things.

A portfolio with 3 unlike things is much more diversified than jumping between those 3 things.

Diversification reduces downside risk.

Pooling everything into one asset increases downside risk.

I would suggest some serious reading about diversification and the benefits of diversification for anyone considering this strategy.


Here is something Nispirus posted that helped me understand the disconnect:

"There is no such thing as risk to the person with a working crystal ball. The concept of “risk” depends on the reality that we do not know what will happen. If we did, the idea of risk would be meaningless."

I will modify this idea:

Someone that thinks they have a crystal ball, that past trends must continue into the future, will not be able to properly understand and incorporate risks, because they believe they are taking no/little risk due to that belief in their crystal ball.

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Re: My trend following strategy and experience

Post by Lee_WSP » Thu May 23, 2019 12:24 pm

I agree with ABC. You cannot by definition diversify a portfolio using time. By definition, diversification is to diversify your assets over the same time period. At least that is what the generally agreed upon definition is.

But, I still understand what you are trying to accomplish. Perhaps use a different word than diversification?

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Re: My trend following strategy and experience

Post by willthrill81 » Thu May 23, 2019 12:41 pm

Lee_WSP wrote:
Thu May 23, 2019 12:24 pm
I agree with ABC. You cannot by definition diversify a portfolio using time. By definition, diversification is to diversify your assets over the same time period. At least that is what the generally agreed upon definition is.

But, I still understand what you are trying to accomplish. Perhaps use a different word than diversification?
The source I quoted said nothing about diversification.

Diversification as it's usually defined is more applicable to BAH than TF.
“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: My trend following strategy and experience

Post by Lee_WSP » Thu May 23, 2019 1:23 pm

willthrill81 wrote:
Thu May 23, 2019 12:41 pm
Lee_WSP wrote:
Thu May 23, 2019 12:24 pm
I agree with ABC. You cannot by definition diversify a portfolio using time. By definition, diversification is to diversify your assets over the same time period. At least that is what the generally agreed upon definition is.

But, I still understand what you are trying to accomplish. Perhaps use a different word than diversification?
The source I quoted said nothing about diversification.

Diversification as it's usually defined is more applicable to BAH than TF.
I don't think s/he was replying to your posts.

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Re: My trend following strategy and experience

Post by abc132 » Thu May 23, 2019 3:05 pm

Lee_WSP wrote:
Thu May 23, 2019 12:24 pm
I agree with ABC. You cannot by definition diversify a portfolio using time. By definition, diversification is to diversify your assets over the same time period. At least that is what the generally agreed upon definition is.

But, I still understand what you are trying to accomplish. Perhaps use a different word than diversification?
Diversification is the attempt to pool unlike assets so that they are less likely to all go down (or up) at the same time. We can easily look at whether a system does this whether market timing or not.

Buy and hold via Boglehead approach does this very nicely.

We have heard sayings like "Diversification is the only free lunch". I don't want to word-smith this phrase, but the take away is that diversification is very important. You limit your losses with a diversified portfolio.

Shifting 100% of assets from one investment or asset class to another is some of the worst (risk) behavior for an individual to do. It is more high risk than a diversified fund. It is still rational to do this if you accept the additional risk in search of more reward.

The market timing plan shown here has more risk than buy and hold, and is more risky than a 100% stock index fund.

If the OP thinks most Bogleheads are not investing conservatively enough, and that their plan is conservative, it shows a misunderstanding of risk.

Past performance is not risk. Good past or hypothetical performance does not mean low risk.

Volatility is not risk.

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Re: My trend following strategy and experience

Post by tadamsmar » Thu May 23, 2019 3:33 pm

Looks like you ignore expense ratio (er).

You just go with the investment with the highest 7-month trailing relative performance.

If I did that in my 401K, I might end up investing in a fund with a 1.06% er or one with .015 er.

Also, you seem to be using a generic product to compute relative performance. Are you ignoring er when you compute relative performance?

Are you really using the actual relative performance (net fees) of your investment options to make your decisions?

What exactly is the "relative performance" calculation that you use?

If you are ignoring fees, that puts an extra burden on the momentum theory that you believe in. Relative performance might persist while not persisting well enough to overcome the relative fees.

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Re: My trend following strategy and experience

Post by willthrill81 » Thu May 23, 2019 3:39 pm

tadamsmar wrote:
Thu May 23, 2019 3:33 pm
Also, you seem to be using a generic product to compute relative performance. Are you ignoring er when you compute relative performance?

Are you really using the actual relative performance (net fees) of your investment options to make your decisions?

What exactly is the "relative performance" calculation that you use?
I am only examining post-ER performance. Portfolio Visualizer does the calculation for me, but it just compares the returns of each fund over the prior 7 months.
Last edited by willthrill81 on Thu May 23, 2019 8:04 pm, edited 2 times in total.
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Re: My trend following strategy and experience

Post by Forester » Thu May 23, 2019 6:35 pm

abc132 wrote:
Thu May 23, 2019 3:05 pm
Lee_WSP wrote:
Thu May 23, 2019 12:24 pm
I agree with ABC. You cannot by definition diversify a portfolio using time. By definition, diversification is to diversify your assets over the same time period. At least that is what the generally agreed upon definition is.

But, I still understand what you are trying to accomplish. Perhaps use a different word than diversification?
Diversification is the attempt to pool unlike assets so that they are less likely to all go down (or up) at the same time. We can easily look at whether a system does this whether market timing or not.

Buy and hold via Boglehead approach does this very nicely.

We have heard sayings like "Diversification is the only free lunch". I don't want to word-smith this phrase, but the take away is that diversification is very important. You limit your losses with a diversified portfolio.

Shifting 100% of assets from one investment or asset class to another is some of the worst (risk) behavior for an individual to do. It is more high risk than a diversified fund. It is still rational to do this if you accept the additional risk in search of more reward.

The market timing plan shown here has more risk than buy and hold, and is more risky than a 100% stock index fund.

If the OP thinks most Bogleheads are not investing conservatively enough, and that their plan is conservative, it shows a misunderstanding of risk.

Past performance is not risk. Good past or hypothetical performance does not mean low risk.

Volatility is not risk.
If we follow this logic; anyone who buys a stock or other financial instrument probably should not use a stop loss.

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Re: My trend following strategy and experience

Post by willthrill81 » Thu May 23, 2019 8:05 pm

Forester wrote:
Thu May 23, 2019 6:35 pm
abc132 wrote:
Thu May 23, 2019 3:05 pm
Lee_WSP wrote:
Thu May 23, 2019 12:24 pm
I agree with ABC. You cannot by definition diversify a portfolio using time. By definition, diversification is to diversify your assets over the same time period. At least that is what the generally agreed upon definition is.

But, I still understand what you are trying to accomplish. Perhaps use a different word than diversification?
Diversification is the attempt to pool unlike assets so that they are less likely to all go down (or up) at the same time. We can easily look at whether a system does this whether market timing or not.

Buy and hold via Boglehead approach does this very nicely.

We have heard sayings like "Diversification is the only free lunch". I don't want to word-smith this phrase, but the take away is that diversification is very important. You limit your losses with a diversified portfolio.

Shifting 100% of assets from one investment or asset class to another is some of the worst (risk) behavior for an individual to do. It is more high risk than a diversified fund. It is still rational to do this if you accept the additional risk in search of more reward.

The market timing plan shown here has more risk than buy and hold, and is more risky than a 100% stock index fund.

If the OP thinks most Bogleheads are not investing conservatively enough, and that their plan is conservative, it shows a misunderstanding of risk.

Past performance is not risk. Good past or hypothetical performance does not mean low risk.

Volatility is not risk.
If we follow this logic; anyone who buys a stock or other financial instrument probably should not use a stop loss.
That anyone would believe that my strategy is riskier than a buy-and-hold strategy of 100% stock is beyond incredible to me, and that sort of thing is partly why I am choosing to not respond to many of the posts in this thread of late.
“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: My trend following strategy and experience

Post by tadamsmar » Thu May 23, 2019 9:04 pm

willthrill81 wrote:
Thu May 23, 2019 3:39 pm
tadamsmar wrote:
Thu May 23, 2019 3:33 pm
Also, you seem to be using a generic product to compute relative performance. Are you ignoring er when you compute relative performance?

Are you really using the actual relative performance (net fees) of your investment options to make your decisions?

What exactly is the "relative performance" calculation that you use?
I am only examining post-ER performance. Portfolio Visualizer does the calculation for me, but it just compares the returns of each fund over the prior 7 months.
So "relative performance" is just based on the current price minus the price 7 months ago then divided by the price 7 months ago?

When UER is above its 12-month moving average, then you get in or stay in if one of the 7-month moving averages of the stock fund available to you is below the stock fund's current price. But you invest in the stock fund that has the highest relative performance.

Do I have this right, you are using two different indicators?

The stock fund you invest in may not be the stock fund that has a price higher than its 7-month moving average. This produces a situation where the stock fund you invest has a downward trend as indicated by the moving average and current price.

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Re: My trend following strategy and experience

Post by willthrill81 » Thu May 23, 2019 9:33 pm

tadamsmar wrote:
Thu May 23, 2019 9:04 pm
willthrill81 wrote:
Thu May 23, 2019 3:39 pm
tadamsmar wrote:
Thu May 23, 2019 3:33 pm
Also, you seem to be using a generic product to compute relative performance. Are you ignoring er when you compute relative performance?

Are you really using the actual relative performance (net fees) of your investment options to make your decisions?

What exactly is the "relative performance" calculation that you use?
I am only examining post-ER performance. Portfolio Visualizer does the calculation for me, but it just compares the returns of each fund over the prior 7 months.
So "relative performance" is just based on the current price minus the price 7 months ago then divided by the price 7 months ago?

When UER is above its 12-month moving average, then you get in or stay in if one of the 7-month moving averages of the stock fund available to you is below the stock fund's current price. But you invest in the stock fund that has the highest relative performance.

Do I have this right, you are using two different indicators?

The stock fund you invest in may not be the stock fund that has a price higher than its 7-month moving average. This produces a situation where the stock fund you invest has a downward trend as indicated by the moving average and current price.
Both the UER must be above its 12 MMA and stocks have a lower relative advantage over the prior 7 months than bonds for me to move out of stocks. If either of those conditions is not met, I am 100% in stocks.

When I am in stocks, I own the fund with the highest relative performance over the prior 7 months.

I addressed what I believe is the other part your question further up the thread.
willthrill81 wrote:
Sat Feb 02, 2019 1:27 pm
I didn't specify it in the OP, but if VBMFX has had higher relative strength (as measured by PV, the tool I'm using rather than calculating all of this manually; consult it if you want more details on the specifics) than all of my available stock indices (in addition, of course, to the UER being above its 12 MMA), I will move into fixed income.
“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: My trend following strategy and experience

Post by tadamsmar » Thu May 23, 2019 10:18 pm

In the OP you said you were using the 7-month moving average:
To put it simply, this system calls me to own stocks unless both (1) the U.S. unemployment rate (UER) is above its 12 month moving average and (2) all available stock indexes are below their 7 month moving average.
But I guess you wrong about that. Perhaps you corrected yourself somewhere along the way, sorry if is missed your correction.

You use many undefined terms: "relative advantage", "relative strength", "relative performance".

Where are those terms defined?

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Re: My trend following strategy and experience

Post by willthrill81 » Thu May 23, 2019 10:29 pm

tadamsmar wrote:
Thu May 23, 2019 10:18 pm
You use many undefined terms: "relative advantage", "relative strength", "relative performance".

Where are those terms defined?
I'm referring to the same concept every time.
The relative strength momentum model invests in the best performing assets in the model based on each asset's past return.
https://www.portfoliovisualizer.com/tes ... ingModel=5
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Re: My trend following strategy and experience

Post by tadamsmar » Thu May 23, 2019 10:37 pm

willthrill81 wrote:
Thu May 23, 2019 10:29 pm
tadamsmar wrote:
Thu May 23, 2019 10:18 pm
You use many undefined terms: "relative advantage", "relative strength", "relative performance".

Where are those terms defined?
I'm referring to the same concept every time.
The relative strength momentum model invests in the best performing assets in the model based on each asset's past return.
https://www.portfoliovisualizer.com/tes ... ingModel=5
What exactly does that mean? I cannot find a clear mathematical definition anywhere in Portfolio Visualizer.

I did find an actual mathematical definition of strength:

(C-P)/P

where:

C is the current price
P is the price 7 months ago

But I also find claims that there are multiple definitions of "relative strength". So, I am not sure if this is the definition that you are using.

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Re: My trend following strategy and experience

Post by willthrill81 » Thu May 23, 2019 10:41 pm

tadamsmar wrote:
Thu May 23, 2019 10:37 pm
willthrill81 wrote:
Thu May 23, 2019 10:29 pm
tadamsmar wrote:
Thu May 23, 2019 10:18 pm
You use many undefined terms: "relative advantage", "relative strength", "relative performance".

Where are those terms defined?
I'm referring to the same concept every time.
The relative strength momentum model invests in the best performing assets in the model based on each asset's past return.
https://www.portfoliovisualizer.com/tes ... ingModel=5
What exactly does that mean? I cannot find a clear mathematical definition anywhere in Portfolio Visualizer.

I did find an actual mathematical definition of strength:

(C-P)/P

where:

C is the current price
P is the price 7 months ago

But I also find claims that there are multiple definitions of "relative strength". So, I am not sure if this is the definition that you are using.
For mutual funds, the rate of change within the NAV of a specified fund is calculated over a specified time period and compared to that of other mutual funds. For example, if a fund has a current NAV of $110, up from a previous six-month NAV of $100, the rate of change is 10%. If a second mutual fund has a current NAV of $92, up from a previous six-month NAV of $80, the rate of change is 15%. By comparing the two rates, the second mutual fund would be seen as having a higher relative strength when compared to the first.
https://www.investopedia.com/terms/r/re ... rength.asp
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Re: My trend following strategy and experience

Post by abc132 » Thu May 23, 2019 10:51 pm

willthrill81 wrote:
Thu May 23, 2019 8:05 pm

That anyone would believe that my strategy is riskier than a buy-and-hold strategy of 100% stock is beyond incredible to me, and that sort of thing is partly why I am choosing to not respond to many of the posts in this thread of late.
You spent all of 2018 in stocks, right?

That is a riskier portfolio than someone with even 80/20 stock/bond.

You lost 4% because of taking that risk, which was worse than what anyone with a similar stock index but with the addition of bonds earned.

This year, you jumped in and out of the market, losing 10% vs the market, and then put everything into emerging markets, losing another 5%.

This has been the definition of risky behavior.


The unfortunate part is that you have not been rewarded for taking on the at risk, and that you believe you took less risk.


Name a mix of diversified stocks and bonds that could have done worse over the last 1.5 years?

By what means are you able to under perform 100% stocks, and any mix of stocks and bonds, while spending 90% of your time fully in stocks, if not by taking on additional risks? (market timing and non-diversification)

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Re: My trend following strategy and experience

Post by LittleD » Fri May 24, 2019 6:01 am

OMG...Some of you need to just think before you ask questions. His plan is based on two vectors. The economy UER has to be in his favor and the stock market (SPX) has to be in a fairly long trend using a 7mo SMA for him to be invested. He checks his two vectors at the beginning of every month to determine if he will stay in for the next month or exit. If the Market is not trending (ie. trading), the system cannot work very well because of the whipsaw issues inherent in every trend model. There is nothing at all wrong with buy and hold for those who just want to set it and forget it. A diversified 60/40 or 50/50 portfolio will also mitigate downside risk tails in a crash or extended recession. Many on this board practiced market timing in 2008-2009 even though they won't admit it because they used the ICSIA model. ( I can't stand it anymore!)

His model works for him especially in recessions when the market could easily go down more than 50%. It's very mentally hard to sit there and do nothing as your hard earned money gets cut in half. Remember the market is about fear and greed. Fear takes the elevator down and greed takes the escalator up. Fear is twice the emotion as greed.

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Re: My trend following strategy and experience

Post by tadamsmar » Fri May 24, 2019 9:26 am

LittleD wrote:
Fri May 24, 2019 6:01 am
OMG...Some of you need to just think before you ask questions. His plan is based on two vectors. The economy UER has to be in his favor and the stock market (SPX) has to be in a fairly long trend using a 7mo SMA for him to be invested.
He does not use the 7mo SMA. He uses the 7mo relative strength.

Willthrill81 incorrectly specified his method in the OP and he has at least partially clarified what he is actually doing since then.

(Sometimes even thinking won't help!)

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Re: My trend following strategy and experience

Post by Lee_WSP » Fri May 24, 2019 10:31 am

tadamsmar wrote:
Fri May 24, 2019 9:26 am
LittleD wrote:
Fri May 24, 2019 6:01 am
OMG...Some of you need to just think before you ask questions. His plan is based on two vectors. The economy UER has to be in his favor and the stock market (SPX) has to be in a fairly long trend using a 7mo SMA for him to be invested.
He does not use the 7mo SMA. He uses the 7mo relative strength.

Willthrill81 incorrectly specified his method in the OP and he has at least partially clarified what he is actually doing since then.

(Sometimes even thinking won't help!)
His strategy is quoted below: (Emphasis added)

[/quote]
willthrill81 wrote:
Fri Jan 18, 2019 2:08 pm

Unless both the UER is above its 12 MMA and all available stock indexes are below their 7 MMA, I remain in stocks. As soon as either of those conditions is no longer true, I move back into stocks.
The complication is that when he is in stocks, he chooses which stocks to be in based on a relative strength strategy. This is the part that a lot of readers miss. Here's another explanation by Will:
willthrill81 wrote:
Thu May 23, 2019 9:33 pm
tadamsmar wrote:
Thu May 23, 2019 9:04 pm
willthrill81 wrote:
Thu May 23, 2019 3:39 pm
tadamsmar wrote:
Thu May 23, 2019 3:33 pm
Also, you seem to be using a generic product to compute relative performance. Are you ignoring er when you compute relative performance?

Are you really using the actual relative performance (net fees) of your investment options to make your decisions?

What exactly is the "relative performance" calculation that you use?
I am only examining post-ER performance. Portfolio Visualizer does the calculation for me, but it just compares the returns of each fund over the prior 7 months.
So "relative performance" is just based on the current price minus the price 7 months ago then divided by the price 7 months ago?

When UER is above its 12-month moving average, then you get in or stay in if one of the 7-month moving averages of the stock fund available to you is below the stock fund's current price. But you invest in the stock fund that has the highest relative performance.

Do I have this right, you are using two different indicators?

The stock fund you invest in may not be the stock fund that has a price higher than its 7-month moving average. This produces a situation where the stock fund you invest has a downward trend as indicated by the moving average and current price.
Both the UER must be above its 12 MMA and stocks have a lower relative advantage over the prior 7 months than bonds for me to move out of stocks. If either of those conditions is not met, I am 100% in stocks.

When I am in stocks, I own the fund with the highest relative performance over the prior 7 months.

I addressed what I believe is the other part your question further up the thread.
willthrill81 wrote:
Sat Feb 02, 2019 1:27 pm
I didn't specify it in the OP, but if VBMFX has had higher relative strength (as measured by PV, the tool I'm using rather than calculating all of this manually; consult it if you want more details on the specifics) than all of my available stock indices (in addition, of course, to the UER being above its 12 MMA), I will move into fixed income.

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Re: My trend following strategy and experience

Post by willthrill81 » Fri May 24, 2019 10:51 am

Lee_WSP wrote:
Fri May 24, 2019 10:31 am
tadamsmar wrote:
Fri May 24, 2019 9:26 am
LittleD wrote:
Fri May 24, 2019 6:01 am
OMG...Some of you need to just think before you ask questions. His plan is based on two vectors. The economy UER has to be in his favor and the stock market (SPX) has to be in a fairly long trend using a 7mo SMA for him to be invested.
He does not use the 7mo SMA. He uses the 7mo relative strength.

Willthrill81 incorrectly specified his method in the OP and he has at least partially clarified what he is actually doing since then.

(Sometimes even thinking won't help!)
His strategy is quoted below: (Emphasis added)
willthrill81 wrote:
Fri Jan 18, 2019 2:08 pm

Unless both the UER is above its 12 MMA and all available stock indexes are below their 7 MMA, I remain in stocks. As soon as either of those conditions is no longer true, I move back into stocks.
The complication is that when he is in stocks, he chooses which stocks to be in based on a relative strength strategy. This is the part that a lot of readers miss. Here's another explanation by Will:
willthrill81 wrote:
Thu May 23, 2019 9:33 pm
tadamsmar wrote:
Thu May 23, 2019 9:04 pm
willthrill81 wrote:
Thu May 23, 2019 3:39 pm
tadamsmar wrote:
Thu May 23, 2019 3:33 pm
Also, you seem to be using a generic product to compute relative performance. Are you ignoring er when you compute relative performance?

Are you really using the actual relative performance (net fees) of your investment options to make your decisions?

What exactly is the "relative performance" calculation that you use?
I am only examining post-ER performance. Portfolio Visualizer does the calculation for me, but it just compares the returns of each fund over the prior 7 months.
So "relative performance" is just based on the current price minus the price 7 months ago then divided by the price 7 months ago?

When UER is above its 12-month moving average, then you get in or stay in if one of the 7-month moving averages of the stock fund available to you is below the stock fund's current price. But you invest in the stock fund that has the highest relative performance.

Do I have this right, you are using two different indicators?

The stock fund you invest in may not be the stock fund that has a price higher than its 7-month moving average. This produces a situation where the stock fund you invest has a downward trend as indicated by the moving average and current price.
Both the UER must be above its 12 MMA and stocks have a lower relative advantage over the prior 7 months than bonds for me to move out of stocks. If either of those conditions is not met, I am 100% in stocks.

When I am in stocks, I own the fund with the highest relative performance over the prior 7 months.

I addressed what I believe is the other part your question further up the thread.
willthrill81 wrote:
Sat Feb 02, 2019 1:27 pm
I didn't specify it in the OP, but if VBMFX has had higher relative strength (as measured by PV, the tool I'm using rather than calculating all of this manually; consult it if you want more details on the specifics) than all of my available stock indices (in addition, of course, to the UER being above its 12 MMA), I will move into fixed income.
tadamsmar is correct. In the OP, I should have said that in the first part of my strategy, I am invested in equities unless both the UER is above its 12 MMA and stocks have had a lower relative strength than bonds over the prior 7 months. What you quote for the second part of my strategy (i.e. which stock indexes to be invested in) is correct.
“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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tadamsmar
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Re: My trend following strategy and experience

Post by tadamsmar » Fri May 24, 2019 11:21 am

willthrill81 wrote:
Thu May 23, 2019 9:33 pm
I addressed what I believe is the other part your question further up the thread.
willthrill81 wrote:
Sat Feb 02, 2019 1:27 pm
I didn't specify it in the OP, but if VBMFX has had higher relative strength (as measured by PV, the tool I'm using rather than calculating all of this manually; consult it if you want more details on the specifics) than all of my available stock indices (in addition, of course, to the UER being above its 12 MMA), I will move into fixed income.
You seem to be saying that you use VBMFX for all of your relative strength calculations? But you move to "fixed income". Seems that I recall that "fixed income" is not always VBMFX. I seem to recall you use a TIAA real estate fund as the fixed income fund for one of your fiduciaries. Do you really use one type of fixed income (VBMFX) to calculate the relative strength signal and then bail out to another type of fixed income?

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Re: My trend following strategy and experience

Post by willthrill81 » Fri May 24, 2019 11:38 am

tadamsmar wrote:
Fri May 24, 2019 11:21 am
willthrill81 wrote:
Thu May 23, 2019 9:33 pm
I addressed what I believe is the other part your question further up the thread.
willthrill81 wrote:
Sat Feb 02, 2019 1:27 pm
I didn't specify it in the OP, but if VBMFX has had higher relative strength (as measured by PV, the tool I'm using rather than calculating all of this manually; consult it if you want more details on the specifics) than all of my available stock indices (in addition, of course, to the UER being above its 12 MMA), I will move into fixed income.
You seem to be saying that you use VBMFX for all of your relative strength calculations? But you move to "fixed income". Seems that I recall that "fixed income" is not always VBMFX. I seem to recall you use a TIAA real estate fund as the fixed income fund for one of your fiduciaries. Do you really use one type of fixed income (VBMFX) to calculate the relative strength signal and then bail out to another type of fixed income?
For the purposes of determining whether to stay in stocks, I use VBMFX. But I don't necessarily move into VBMFX for several reasons, one of which is that I don't have access to that fund in all of my accounts. In one instance, it just makes more sense to own TIAA Real Estate than a bond fund yielding 3% or less.
“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: My trend following strategy and experience

Post by LittleD » Fri May 24, 2019 11:43 am

Looks like I probably read part of your strategy wrong. Using UER against a 12mo SMA makes perfect sense. I use the LEI for my trading strategy and it also works. I see that you are using a 7mo Dual Momentum strategy for being in Stocks or Bonds based upon the highest relative momentum. I'm not sure you are using an absolute momentum DM strategy to make the investment decision. I use the SPX against a 43wk EMA to determine whether I would be invested in Stocks or not. If I'm on the bull side in Stocks, then I use the DM strategy to select the best indexes (highest relative momentum) to place my bets. If not in Stock indexes, I'm in bonds. Practically, using moving averages and relative momentum are just like kissing cousins. Your strategy will keep you out of major stock crashes due to economic recessions. You still could miss some periods that are caused by the FED crashing the economy. Whipsaws in a non-trending market or what I call a ranging market period will still cause havoc with a market timing or trading system.

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Re: My trend following strategy and experience

Post by willthrill81 » Fri May 24, 2019 11:57 am

LittleD wrote:
Fri May 24, 2019 11:43 am
Looks like I probably read part of your strategy wrong. Using UER against a 12mo SMA makes perfect sense. I use the LEI for my trading strategy and it also works. I see that you are using a 7mo Dual Momentum strategy for being in Stocks or Bonds based upon the highest relative momentum. I'm not sure you are using an absolute momentum DM strategy to make the investment decision. I use the SPX against a 43wk EMA to determine whether I would be invested in Stocks or not. If I'm on the bull side in Stocks, then I use the DM strategy to select the best indexes (highest relative momentum) to place my bets. If not in Stock indexes, I'm in bonds. Practically, using moving averages and relative momentum are just like kissing cousins. Your strategy will keep you out of major stock crashes due to economic recessions. You still could miss some periods that are caused by the FED crashing the economy. Whipsaws in a non-trending market or what I call a ranging market period will still cause havoc with a market timing or trading system.
Your strategy sounds very reasonable to me as well.

I find all of the agonizing over details among those who practice a buy-and-hold approach interesting as the research I've seen regarding trend following is that the specifics often don't matter that much over the long-term. For instance, using a 3 month MA vs. a 12 month MA has resulted in surprisingly similar long-term returns.

And yes, I expect strategies such as ours to keep us out of the brunt of stock market crashes, which generally coincide with recessions. Whipsaws are the price paid for this hedging effect, which is why I find it amusing that some believe that TF is riskier than buy-and-hold of 100% stock. Yes, TF is likely to underperform buy-and-hold during the 'good' times, but you should know that going into it.
“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: My trend following strategy and experience

Post by abc132 » Fri May 24, 2019 12:02 pm

LittleD wrote:
Fri May 24, 2019 6:01 am
OMG...Some of you need to just think before you ask questions. His plan is based on two vectors. The economy UER has to be in his favor and the stock market (SPX) has to be in a fairly long trend using a 7mo SMA for him to be invested. He checks his two vectors at the beginning of every month to determine if he will stay in for the next month or exit. If the Market is not trending (ie. trading), the system cannot work very well because of the whipsaw issues inherent in every trend model. There is nothing at all wrong with buy and hold for those who just want to set it and forget it. A diversified 60/40 or 50/50 portfolio will also mitigate downside risk tails in a crash or extended recession. Many on this board practiced market timing in 2008-2009 even though they won't admit it because they used the ICSIA model. ( I can't stand it anymore!)

His model works for him especially in recessions when the market could easily go down more than 50%. It's very mentally hard to sit there and do nothing as your hard earned money gets cut in half. Remember the market is about fear and greed. Fear takes the elevator down and greed takes the escalator up. Fear is twice the emotion as greed.
There is no reason this model can't sell at the bottom and not protect against a 50% drop. Two factors does not guarantee the signals will not go wrong, as you yourself state. The predictions for the next 10 years are low (4% real returns), so multiple sideways markets (confused signals) have a higher than normal chance of happening.

It's OK to think the chances are small of doing worse than the market in downturns, but the risk is real.

There is nothing wrong with someone doing whatever they want with their own money, but a strategy that skips the protection of bonds and relies on market timing is inherently more risky. It's realized under performance in the last 1.5 years when compared to any stock/bond portfolio is an indication of that risk. The stated preference of not being stuck in bonds with 1% real returns shows that this is a risk vs reward decision, and not risk mitigation.

Hopefully it works out well - I expect it to under perform the market and hope that it can meet its goals of downside protection. I see no guarantees whatsoever.

People bailing out in 2008 is a reminder to keep enough emergency funds to keep you from needing to do so. You never need to sell if you have a plan with enough safe assets.

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Re: My trend following strategy and experience

Post by LittleD » Fri May 24, 2019 2:34 pm

Yes, will I underperform the SPX in the long run...absolutely I will. Will buy & hold underperform the SPX...absolutely they will if they also hold international, small-cap and bonds for diversification. Here's hoping that both of us sleep well at night when the next big one hits us in the face some unsuspecting morning. I remember well 1987 and the market was down over 20% by mid-day. Lots of my co-workers were crying in their beer that night.

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Re: My trend following strategy and experience

Post by abc132 » Fri May 24, 2019 6:14 pm

LittleD wrote:
Fri May 24, 2019 2:34 pm
Yes, will I underperform the SPX in the long run...absolutely I will. Will buy & hold underperform the SPX...absolutely they will if they also hold international, small-cap and bonds for diversification. Here's hoping that both of us sleep well at night when the next big one hits us in the face some unsuspecting morning. I remember well 1987 and the market was down over 20% by mid-day. Lots of my co-workers were crying in their beer that night.
Here's to hoping your model can trade often enough to prevent this from happening. It's difficult to see how the proposed model of changing investments once a month, or checking once a week to get out of the market can do this. Information travels much faster than it did 20 years ago.

I don't see the protection from a one day drop provided by those giving examples of their systems, other than getting lucky when they happen to be out of the market. I guess we could all become market timers, and take that historical under performance of all market timers, and hope we get lucky.

The collective wisdom of what is suggested here says otherwise, and bonds should be a part of protecting your assets.

It's better to be lucky than good, but we can only control the latter.

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Re: My trend following strategy and experience

Post by LittleD » Fri May 24, 2019 8:05 pm

Okay, let me address your questions. The LEI formula I use has a long history of identifying the start of a recession by 2-7 months early. Clearly that is enough time to wait for the SPX to trade below the 43wk EMA. I do not sell until both signals tell me to. Could I be late in the future...sure. There are no guarantees in life or the stock market for sure. Looking at history...and it's only history, my maximum drawdown would have been about 23% before completely moving to the bond side. Yes, there have been some whipsaw periods due mainly to markets transitioning from trending to ranging. If the market is not trending, the signals can come too fast to catch. My strategy and implementation work well for me and I sleep just fine at night knowing well the mechanical levers that control my fate. Lots of different ways to manage a portfolio work just fine so stick with something that works for you.

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Re: My trend following strategy and experience

Post by abc132 » Sat May 25, 2019 1:53 am

LittleD wrote:
Fri May 24, 2019 8:05 pm
Okay, let me address your questions. The LEI formula I use has a long history of identifying the start of a recession by 2-7 months early. Clearly that is enough time to wait for the SPX to trade below the 43wk EMA. I do not sell until both signals tell me to. Could I be late in the future...sure. There are no guarantees in life or the stock market for sure. Looking at history...and it's only history, my maximum drawdown would have been about 23% before completely moving to the bond side. Yes, there have been some whipsaw periods due mainly to markets transitioning from trending to ranging. If the market is not trending, the signals can come too fast to catch. My strategy and implementation work well for me and I sleep just fine at night knowing well the mechanical levers that control my fate. Lots of different ways to manage a portfolio work just fine so stick with something that works for you.
Agreed.

When I advise to hold bonds for safety instead of relying on market timing, that is a suggestion for those reading this thread who have not made up their minds already. It is advice in the best interest of those here. I personally watched TIAA real estate drop in the 2008 era, so if I were to suggest something like holding treasuries for safety and a negative correlation with stocks instead of TIAA real-estate, that would also be in the best interest of those reading. Maybe someone reading will think about this advice, and benefit.

I hope those market timing truly consider how clear their crystal ball is, and what the consequences could be if they are wrong. After 100 years of market timing the markets have often made fools of even the brightest and best minds.

I do hope you do well with your strategy.

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Re: My trend following strategy and experience

Post by HomerJ » Sat May 25, 2019 2:25 am

willthrill81 wrote:
Thu May 23, 2019 8:05 pm
That anyone would believe that my strategy is riskier than a buy-and-hold strategy of 100% stock is beyond incredible to me
Your strategy might indeed be riskier than buy-an-hold. Why is that thought incredible?

So far, buy and hold has worked because the U.S. markets have always bounced back and gone higher.

You seem fixated on maximum drawdown, but it doesn't matter in accumulation phase if the market recovers and goes higher in the long run.

Remember, the 10% long-term return from the U.S. stock market INCLUDES the crashes.

I don't see why you're so excited about getting out early. Following the market all the way down and back up again has been a winning strategy.

Now, you're following a trend following strategy that ALSO has worked in the past. So far.

But which is riskier? Which thought has the most risk of being wrong in the FUTURE?

The thought that the U.S. stock market goes up in the long run?

Or the thought that the next big crash will be slow enough and/or preceded by unemployment numbers in time for you to get out in a timely manner AND the recovery will be slow enough and/or unemployment numbers will rebound fast enough in time for you to get back in quick enough to make some good money AND that when that happens it will be a big enough gain to overcome all the small losses from all the preceding whipsaws?

Which thought is riskier?

Is it really incredible to you to think that the first thought is less risky? Or at least the two thoughts are the same risk level? Do you really think your plan is so obviously inherently less risky, that it's incredible that anyone would think just buy and holding is the less risky plan?
The J stands for Jay

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Re: My trend following strategy and experience

Post by abc132 » Sat May 25, 2019 4:13 am

willthrill81 wrote:
Fri May 24, 2019 11:57 am
And yes, I expect strategies such as ours to keep us out of the brunt of stock market crashes, which generally coincide with recessions. Whipsaws are the price paid for this hedging effect, which is why I find it amusing that some believe that TF is riskier than buy-and-hold of 100% stock. Yes, TF is likely to underperform buy-and-hold during the 'good' times, but you should know that going into it.
Taking a look at what the average recession has done, how does losing 15% vs the market compare to the average recession?

https://awealthofcommonsense.com/2015/0 ... ecessions/

Maybe it's time to be scared of Whipsaws and 15% under performance.


My portfolio is 17% ahead of the OP due to buy and hold in the last 1.5 years. That crystal ball is going to have to be very clear indeed to ever catch up, and as I continue to move into safe assets, there is little risk that recessions in general are something to fear.

I would encourage others to join me in preserving gains with safe assets, instead of relying on market timing. Timing risk and diversification risk are additional risks that are just not needed with a healthy plan.

Those that think they have crystal balls will not be able to properly incorporate risks because they think they are taking no/little risks.

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