My trend following strategy and experience

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hilink73
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Re: My trend following strategy and experience

Post by hilink73 »

Barsoom wrote: Mon Dec 02, 2019 2:22 pm I finally added the last of the OP article indicators, Corporate Earnings Growth (Total Return EPS). The OP article gives it a 0.8% contribution to strategy return. The indicator triggers when TR EPS annualized growth rate is negative.

[...]

-B
Thanks for this detailed info.
Are those contributions of the indicators cumulative? Or just per chosen strategy?
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BlueEars
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Re: My trend following strategy and experience

Post by BlueEars »

Barsoom wrote: Mon Dec 02, 2019 2:22 pm I finally added the last of the OP article indicators, Corporate Earnings Growth (Total Return EPS). The OP article gives it a 0.8% contribution to strategy return. The indicator triggers when TR EPS annualized growth rate is negative.

Currently, this metric is 4.2% and rapidly falling, based on Shiller data as of Sep 2019. Data for the past 12 months:
  • Oct-2018: 22.62%
  • Nov-2018: 22.61%
  • Dec-2018: 22.50%
  • Jan-2019: 21.50%
  • Feb-2019: 20.16%
  • Mar-2019: 18.41%
  • Apr-2019: 16.15%
  • May-2019: 14.35%
  • Jun-2019: 12.55%
  • Jul-2019: 9.50%
  • Aug-2019: 6.81%
  • Sep-2019: 4.20%
Straight-line forecasting the next three months from the prior nine months:
  • Oct-2019: 2.78%
  • Nov-2019: 0.38%
  • Dec-2019: -2.8% (triggered)
...
This is interesting to me. I have the latest Shiller CAPE report for Nov 15th. I'm not quite sure how you calculated the earnings growth rates above. My take on that would be to use the "real earnings" column and, for example, for Aug 2019 I would compute Aug_2019/Aug_2018 = 134.63/130.54 = 1.031 or 3.1% real earnings growth.

From the Nov 15th Shiller report we get the latest data for Sept 2019. So I would assume at least a 2 month lag in this data availability and possibly a 3 month lag. In other words, I could not get that Sept 2019 earnings data to be useful until maybe Nov 2019 if I grabbed it directly off the SP reporting (I am guessing here) or maybe not until Dec 2019 if depending on the Shiller data update. It turns out this latest Shiller report for Nov 15 was unusually tardy in that the previous report was issued in August (see viewtopic.php?f=10&t=294657&e=1&view=unread#unread).

I would guess the markets are very sensitive to the latest earnings data. Not sure that the SP500 price behavior hasn't already incorporated that information well ahead of waiting for a Shiller report (in contrast to, say, Treasury yield curve data). FWIW, my initial go at this did not seem to indicate my model would benefit from this earnings growth data series.
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Mactheriverrat
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Re: My trend following strategy and experience

Post by Mactheriverrat »

My hats off to willthrill for throwing this thread out there. He's taken a few hits for his non-boglehead approach.

My ideas and charts are as follows.

On the right side of the green lines one should be in index funds
On the right side of the red lines one should be in bond funds.
https://stockcharts.com/h-sc/ui?s=%24%2 ... =703150627

and if one trades stocks - I use Guppy MMA's for finding trend changes.
https://www.youtube.com/watch?v=kjfW2BaeldU&t=291s

IMHO!
Everything evolves. | May Every Sunrise Bring You Hope. May Every Sunset Bring you Peace.
Barsoom
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Re: My trend following strategy and experience

Post by Barsoom »

BlueEars wrote: Mon Dec 02, 2019 4:28 pmThis is interesting to me. I have the latest Shiller CAPE report for Nov 15th. I'm not quite sure how you calculated the earnings growth rates above.
It is detailed in this article from Philosophical Economist, which is linked inside the first linked article in the OP. See Introducing the Total Return EPS Index: A New Tool for Analyzing Fundamental Equity Market Trends. The article includes Excel formulas to create the metric from the Shiller spreadsheet.

Note that Shiller just updated his spreadsheet to add his own Total Return Price and Total Return CAPE, but his method isn't the same as the Philosophical Economist and returns a slightly different result. Also, the Shiller method doesn't attempt to calculate an isolated share count to derive an EPS. There are similarities in Shiller's Total Price calculation, but he doesn't apply a "mean" factor that Philosophical Economist does.

For the growth rate, I used a simple percent change from the current value to the value one year ago ( (new-old)/old ).

After reading the article, I'd be interested in your insights regarding the difference in Shiller's Total Return Price and Philosophical Economist's.

-B
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Re: My trend following strategy and experience

Post by Barsoom »

Sorry, I got busy this afternoon and only really addressed your question of how I calculated the numbers. I just reread your entire post.
BlueEars wrote: Mon Dec 02, 2019 4:28 pmI have the latest Shiller CAPE report for Nov 15th. I'm not quite sure how you calculated the earnings growth rates above.
I didn't really calculate earnings growth, I calculated earnings per share growth based on the Philosophical Economist method. Philosophical Economist called the indicator "Real S&P 500 EPS Growth (yoy)" in his bullet lists, but referred to it as "corporate earnings growth" in the body of the article, and I probably used that shorthand reference instead of the fuller descriptive one. Sorry.
BlueEars wrote: Mon Dec 02, 2019 4:28 pmFrom the Nov 15th Shiller report we get the latest data for Sept 2019. So I would assume at least a 2 month lag in this data availability and possibly a 3 month lag.
Yes, that data seems to be quarterly. All I did was use the Excel Trend function to straight-line forecast the next three months using the prior nine months.
BlueEars wrote: Mon Dec 02, 2019 4:28 pmIt turns out this latest Shiller report for Nov 15 was unusually tardy in that the previous report was issued in August (see viewtopic.php?f=10&t=294657&e=1&view=unread#unread).
I know. I posted to that thread.

I assume he either 1) lost his interns for the summer, or 2) needed the extra time to merge his "alternate CAPE" date set with this one, because it now provides both the original CAPE and the Total Return CAPE. I hope that now that this is done, he will go back to providing a monthly updated spreadsheet.

Philosophical Economist always preferred the Total Return CAPE.

-B
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Forester
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Re: My trend following strategy and experience

Post by Forester »

Emerging markets & US Agg bonds as "canary indicators" for US (& global) equities.

Using a fast momentum filter (1, 3, 6 and 12 months) on VWO (emerging markets) & BND (US agg bonds)

https://papers.ssrn.com/sol3/papers.cfm ... id=3212862
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Forester
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Re: My trend following strategy and experience

Post by Forester »

More on US agg bond negative momentum as a prelude to poor equity performance.

https://allocatesmartly.com/vigilant-a ... w-keuning/
garlandwhizzer
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Re: My trend following strategy and experience

Post by garlandwhizzer »

From the article:

A word of caution

This strategy only holds one asset at any given time, which historically has resulted in extremely high returns, but could also lead to extremely high portfolio volatility and potential for loss.
There is also the problem that 100% of the portfolio is changed as often as every month. This generates huge trading costs and frictions which are of course totally neglected in the backtesting model. Likewise in a taxable account it generates huge short term capital gains which carry the same high tax burden as ordinary income in contrast to long term capital gains which receive preferential tax treatment for those who hold assets longer than 12 months. Backtesting models carefully ignore these considerations. In addition they ignore the increase complexity and work involved in making 100% changes in the portfolio as often as a monthly basis. There is also the point that past strong returns on this or any other backtesting model may not reliably translate into future strong returns. The future of markets has a very limited degree of reliable predictably.

Backtesting models are intellectually fascinating and get those who derive them promotions in academia and huge income for those who create, market, and sell them in the form of funds/management. It is very easy to understand why they are generated so frequently. Literally hundreds of investment factors and countless trading strategies have been identified. Their major real effects of all this research have been to generate promotions for those academics who "discover" them from data mining and to generate exorbitant income for those who create, market, and sell them to the public.

It is quite simple to construct a winning portfolio with data mining given assumptions of no trading costs, no trading frictions, no management costs, no marketing costs, and especially in the case of factors cost-free long/short portfolios that automatically magnify positive results by 100%. Anyone who can do arithmetic can do that over any time period. The evidence that any of these models have worked consistently in practice rather than in these unrealistic models from which they are derived is scant. It seems to me that a bit of skepticism is in order when viewing each new piece of the newly discovered magic secret investing sauce which seems to appear with increasing frequency as time passes.

People very much prefer certainty even if it is wrong to admitting uncertainty up front. Romans and other ancients studied sacrificed sheep entrails the night before a great battle to see if the gods would lead them on to victory. Since the general or a priest knowing the general's will was doing the interpretation, the answer was usually yes if the general actually wanted the battle and no if he didn't want it. Still in spite of this ruse, soldiers maintained their faith in these omens year after year for centuries. Those who seek predictability about the future are often much happier with false certainty than with true uncertainty. IMO there is some degree of parallel between the reading of sheep entrails and the ever increasing production of investing secret sauces from academics and the fund industry. It is up to the Individual investor to separate the wheat from the chaff, but most of us should keep in mind that our brains are wired to magnify wheat and neglect chaff.

Garland Whizzer
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willthrill81
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Re: My trend following strategy and experience

Post by willthrill81 »

garlandwhizzer wrote: Wed Dec 04, 2019 2:03 pm There is also the problem that 100% of the portfolio is changed as often as every month. This generates huge trading costs and frictions which are of course totally neglected in the backtesting model.
Most months, I don't have to make any trades at all. When I do, it might take 10 minutes. It's not at all burdensome. And I encounter no trading costs or other frictions when I do so.
garlandwhizzer wrote: Wed Dec 04, 2019 2:03 pmLikewise in a taxable account it generates huge short term capital gains which carry the same high tax burden as ordinary income in contrast to long term capital gains which receive preferential tax treatment for those who hold assets longer than 12 months.
In general, I would not recommend this strategy for a taxable account and have said so in this thread. I have also said that one's stock position could be effectively zeroed out through the use of futures contracts and no tax implications if an investors wanted to implement such a strategy with a taxable account. That involves some costs, but these are likely much less than capital gains taxes.
garlandwhizzer wrote: Wed Dec 04, 2019 2:03 pmThere is also the point that past strong returns on this or any other backtesting model may not reliably translate into future strong returns. The future of markets has a very limited degree of reliable predictably.
Of course. The future could look very different from the past. But that issue also applies to buy-and-hold and any other strategy we can devise. Buy-and-hold of index funds only 'guarantees' that the investor's returns will closely approximate those of the index less the expense ratio; it says nothing about what the performance of the underlying index will be. There are historic instances of stock markets falling to zero and others languishing for decades, and the could happen again, even on a global scale.

I'm not saying that you believe or are insinuating this, but there seems to be a perception among many that TSM or global stocks will somehow provide investors with the returns they need and that any deviation from that is a literal gamble. That is obviously false; stocks come with no such guarantee, and a given buy-and-hold investor may never be rewarded for taking on the risk associated with stocks.

As noted in the OP, part of my motivation for this strategy is to attempt to reduce 'deep tail risk' and use a strategy that I firmly believe that I can stick with. I fully recognize and accept that my returns may be significantly lower than if I implemented a buy-and-hold strategy of the 3-fund portfolio or something akin to it. Most investors are likely best served with the standard BH advice. But I am not convinced that such advice is appropriate for me. And I've never once recommended my strategy to anyone else.
“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
garlandwhizzer
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Re: My trend following strategy and experience

Post by garlandwhizzer »

willthrill81 wrote:

As noted in the OP, part of my motivation for this strategy is to attempt to reduce 'deep tail risk' and use a strategy that I firmly believe that I can stick with. I fully recognize and accept that my returns may be significantly lower than if I implemented a buy-and-hold strategy of the 3-fund portfolio or something akin to it. Most investors are likely best served with the standard BH advice. But I am not convinced that such advice is appropriate for me. And I've never once recommended my strategy to anyone else.
1+

I totally agree with this. If it's right for willthrill81, that's the bottom line. If your primary goal is to reduce deep tail risk I believe this strategy will very likely do so. I've lived through a few deep and very trying bear markets and know quite well how frightening it can be. However my strong basic faith in the future of capitalism and especially of the US prevents me from panic selling. Of course having a big slug of quality bonds helps as well. So far I've made it through pretty well, but there's always a chance that the next one will get me. I'm willing to take that chance. That's what right for me.

A hidden benefit of such deep tail risk prevention strategy is that in the depths of a black swan event/deep bear market, unlike most investors, you have preserved your investment capital. If you're emotionally willing to buy risk assets at fire sale prices you can do so. Most investors at such moments of general panic either do not have the necessary liquidity to invest, or if they do have it, the courage to pull the trigger. As Graham said during the GD, those with initiative have no money and those with money have no initiative. These incredibly difficult moments however are precisely the times where opportunity for huge future investment outperformance is greatest. Warren Buffett often does this. When the market is fully priced like now he often hordes huge positions in cash/ST Treasury in anticipation of future opportunities to buy quality equity assets marked down massively in price during bad times. Buffett did that in a deal with Goldman Sachs which was desperate for cash in the GR 2008-9.

The choice is out there for reducing severe market risk--high allocation to totally liquid quality bonds kept in reserve, or willthrill81"s approach. I believe both will substantially reduce losses in severe downturns and preserve assets. These approaches may in turn offer a rare opportunity in the depths of severe bear markets to increase risk assets and very likely obtain substantial outsized returns going forward. As Warren Buffett says, you don't have to pick the exact bottom the bear market. All you have to do is to buy a quality asset, a company with sound finance and a long term sustainable advantage over competitors, at a price that is considerably less than it's actually worth. Lots of these opportunities are available at such times and few, if any, at other times.

Garland Whizzer
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willthrill81
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Re: My trend following strategy and experience

Post by willthrill81 »

garlandwhizzer wrote: Wed Dec 04, 2019 7:59 pm
willthrill81 wrote:

As noted in the OP, part of my motivation for this strategy is to attempt to reduce 'deep tail risk' and use a strategy that I firmly believe that I can stick with. I fully recognize and accept that my returns may be significantly lower than if I implemented a buy-and-hold strategy of the 3-fund portfolio or something akin to it. Most investors are likely best served with the standard BH advice. But I am not convinced that such advice is appropriate for me. And I've never once recommended my strategy to anyone else.
1+

I totally agree with this. If it's right for willthrill81, that's the bottom line. If your primary goal is to reduce deep tail risk I believe this strategy will very likely do so. I've lived through a few deep and very trying bear markets and know quite well how frightening it can be. However my strong basic faith in the future of capitalism and especially of the US prevents me from panic selling. Of course having a big slug of quality bonds helps as well. So far I've made it through pretty well, but there's always a chance that the next one will get me. I'm willing to take that chance. That's what right for me.

A hidden benefit of such deep tail risk prevention strategy is that in the depths of a black swan event/deep bear market, unlike most investors, you have preserved your investment capital. If you're emotionally willing to buy risk assets at fire sale prices you can do so. Most investors at such moments of general panic either do not have the necessary liquidity to invest, or if they do have it, the courage to pull the trigger. As Graham said during the GD, those with initiative have no money and those with money have no initiative. These incredibly difficult moments however are precisely the times where opportunity for huge future investment outperformance is greatest. Warren Buffett often does this. When the market is fully priced like now he often hordes huge positions in cash/ST Treasury in anticipation of future opportunities to buy quality equity assets marked down massively in price during bad times. Buffett did that in a deal with Goldman Sachs which was desperate for cash in the GR 2008-9.

The choice is out there for reducing severe market risk--high allocation to totally liquid quality bonds kept in reserve, or willthrill81"s approach. I believe both will substantially reduce losses in severe downturns and preserve assets. These approaches may in turn offer a rare opportunity in the depths of severe bear markets to increase risk assets and very likely obtain substantial outsized returns going forward. As Warren Buffett says, you don't have to pick the exact bottom the bear market. All you have to do is to buy a quality asset, a company with sound finance and a long term sustainable advantage over competitors, at a price that is considerably less than it's actually worth. Lots of these opportunities are available at such times and few, if any, at other times.

Garland Whizzer
A very fair answer and very well said! :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
rascott
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Re: My trend following strategy and experience

Post by rascott »

I'm using a trend following system based upon price (9 month MA) to hold leveraged ETFs (mainly TQQQ).... so the info discussed here is very helpful.
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Forester
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Re: My trend following strategy and experience

Post by Forester »

It's funny that people on here chase their own tails over 3.5% vs 4% withdrawal rate, sequence of returns, bond tents etc etc, when there's strong evidence that even only 10% or 20% allocated to equity trend following would likely make their retirement plans more robust. There's no good reason for the concept of a "portfolio stop loss" not to gain traction other than superstitious beliefs.
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willthrill81
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Re: My trend following strategy and experience

Post by willthrill81 »

Forester wrote: Thu Dec 05, 2019 5:05 am It's funny that people on here chase their own tails over 3.5% vs 4% withdrawal rate, sequence of returns, bond tents etc etc, when there's strong evidence that even only 10% or 20% allocated to equity trend following would likely make their retirement plans more robust. There's no good reason for the concept of a "portfolio stop loss" not to gain traction other than superstitious beliefs.
Our views of the world are result of our paradigms. One of the paradigms of many here is that it's impossible to reliably 'time' the market in a favorable way at all. As such, they reject the notion of stop losses, trend following, target volatility, etc. In many cases, evidence to the contrary is to be dismissed because it doesn't fit the paradigm, and evidence in support of their paradigm is held to (i.e. confirmation bias).

There are some here who seem to be open to the idea of trend following but simply find the evidence not sufficiently persuasive. One logical person can look at a given set of information and reach one conclusion, while another logical person can look at the same information and come to a different conclusion. It doesn't mean that either is being illogical; it's a matter of differences in perception, psychology, and sometimes paradigms.

It seems to be uncommon for someone to see the value in multiple very distinct strategies. Most only seem to see one strategy as being plausible and see all others as implausible.

Buy-and-hold can work very well, but it has risks. Trend following can also work very well, but it too has risks. There is no magic bullet.
“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 »

Forester wrote: Thu Dec 05, 2019 5:05 am It's funny that people on here chase their own tails over 3.5% vs 4% withdrawal rate, sequence of returns, bond tents etc etc, when there's strong evidence that even only 10% or 20% allocated to equity trend following would likely make their retirement plans more robust. There's no good reason for the concept of a "portfolio stop loss" not to gain traction other than superstitious beliefs.
Is there any reason to think that trend following in tax-deferred accounts is likely to make your retirement plan less robust?
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BlueEars
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Re: My trend following strategy and experience

Post by BlueEars »

tadamsmar wrote: Thu Dec 05, 2019 11:48 am
Forester wrote: Thu Dec 05, 2019 5:05 am It's funny that people on here chase their own tails over 3.5% vs 4% withdrawal rate, sequence of returns, bond tents etc etc, when there's strong evidence that even only 10% or 20% allocated to equity trend following would likely make their retirement plans more robust. There's no good reason for the concept of a "portfolio stop loss" not to gain traction other than superstitious beliefs.
Is there any reason to think that trend following in tax-deferred accounts is likely to make your retirement plan less robust?
There are some caveats to using trend following that could affect retirees. A few I can think of:
1) Don't adopt a poorly designed trend following approach. Any approach should take into account that sudden declines like October 1987 can happen.
2) Be sure you can implement the methodology for the long haul. You have to follow up even if you are ill or traveling or there is some disturbing life event going on that distracts you.
3) If you are having cognitive issues perhaps move to buy-hold and/or use an advisor.
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willthrill81
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Re: My trend following strategy and experience

Post by willthrill81 »

BlueEars wrote: Thu Dec 05, 2019 12:29 pm
tadamsmar wrote: Thu Dec 05, 2019 11:48 am
Forester wrote: Thu Dec 05, 2019 5:05 am It's funny that people on here chase their own tails over 3.5% vs 4% withdrawal rate, sequence of returns, bond tents etc etc, when there's strong evidence that even only 10% or 20% allocated to equity trend following would likely make their retirement plans more robust. There's no good reason for the concept of a "portfolio stop loss" not to gain traction other than superstitious beliefs.
Is there any reason to think that trend following in tax-deferred accounts is likely to make your retirement plan less robust?
There are some caveats to using trend following that could affect retirees. A few I can think of:
1) Don't adopt a poorly designed trend following approach. Any approach should take into account that sudden declines like October 1987 can happen.
2) Be sure you can implement the methodology for the long haul. You have to follow up even if you are ill or traveling or there is some disturbing life event going on that distracts you.
3) If you are having cognitive issues perhaps move to buy-hold and/or use an advisor.
To add to #2, you must be prepared to lag a buy-and-hold approach, perhaps for many years and especially in a strong bull market.
“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
Barsoom
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Re: My trend following strategy and experience

Post by Barsoom »

hilink73 wrote: Mon Dec 02, 2019 3:37 pm
Barsoom wrote: Mon Dec 02, 2019 2:22 pm I finally added the last of the OP article indicators, Corporate Earnings Growth (Total Return EPS). The OP article gives it a 0.8% contribution to strategy return. The indicator triggers when TR EPS annualized growth rate is negative.

[...]

-B
Thanks for this detailed info.
Are those contributions of the indicators cumulative? Or just per chosen strategy?
Sorry, I just realized I never answered your question.

In the OP articles, the indicators are individual in the sense that any one of them triggering is all it takes to trigger the exit strategy when the S&P 500 is also below its 10MMA (in the original article - I've been using 9MMA as being closer to the 200DMA). Different recession exits may be triggered by different indicators, but in the recent past recessions, all the indicators were triggered before the S&P 500 crossed its trigger.

This applies only to the original seven indicators, not the full list of additional leading indicators I added.

This article analyzes each indicator separately.

This article has nice summary tables showing the contributions and sensitivities of the individual indicators (it's the second article linked in the OP).

Image

-B
Barsoom
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Re: My trend following strategy and experience

Post by Barsoom »

willthrill81 wrote: Thu Dec 05, 2019 12:53 pm
BlueEars wrote: Thu Dec 05, 2019 12:29 pm
tadamsmar wrote: Thu Dec 05, 2019 11:48 am
Forester wrote: Thu Dec 05, 2019 5:05 am It's funny that people on here chase their own tails over 3.5% vs 4% withdrawal rate, sequence of returns, bond tents etc etc, when there's strong evidence that even only 10% or 20% allocated to equity trend following would likely make their retirement plans more robust. There's no good reason for the concept of a "portfolio stop loss" not to gain traction other than superstitious beliefs.
Is there any reason to think that trend following in tax-deferred accounts is likely to make your retirement plan less robust?
There are some caveats to using trend following that could affect retirees. A few I can think of:
1) Don't adopt a poorly designed trend following approach. Any approach should take into account that sudden declines like October 1987 can happen.
2) Be sure you can implement the methodology for the long haul. You have to follow up even if you are ill or traveling or there is some disturbing life event going on that distracts you.
3) If you are having cognitive issues perhaps move to buy-hold and/or use an advisor.
To add to #2, you must be prepared to lag a buy-and-hold approach, perhaps for many years and especially in a strong bull market.
Correct me if I'm wrong, but would you say that the retiree world is actually very different from the saver world?

That is, the saver follows a "buy and hold" strategy for the 30+ years they are earning an income, but the retiree follows a "hold and sell" strategy during the 30 years they must live off of their savings?

As a retiree, to me "hold" also means "protect" and sell. A trend following strategy is about protecting my portfolio from anticipated drops when long-term indicators suggest a looming downturn in the economic environment. "Protecting" is important because I don't have a salary anymore to insulate me from the market recovery time.

To me, the risk as a retiree is that the downturn doesn't come and reentering the market costs the retiree the small period of growth between exit and reentry. This is mitigated to some degree by the portion of the retiree portfolio that is in equities vs bonds, meaning that the retiree my have less equity exposure than the B&H investor has.

-B
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Forester
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Re: My trend following strategy and experience

Post by Forester »

Pacer ETFs charge 0.60% for a straightforward equity trend strategy. Perfect to slot into a lazy Boglehead portfolio https://www.paceretfs.com/products/ptlc
Barsoom
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Re: My trend following strategy and experience

Post by Barsoom »

Let me add another retiree thought:

Another aspect of this is what I'll call "lifestyle." As an accumulator, the question comes down to how much lifestyle one wishes to "buy" in retirement. For me, my goal was to be able to replace 100% of my income, essentially sustaining my current lifestyle into retirement without having to work for it anymore. I did this. As others choose their "number," I'd think a determinant is what kind of lifestyle they are acceptable with during retirement.

As a "protect and sell" investor, I'm motivated to protect my lifestyle against downturns, since I no longer have a salary to sustain me through market downturns. A B&H investor can accept the downturn knowing that the recovery will make them whole and the market will continue to grow. A retiree can also keep to their SWR and hope that the recovery period is short. I think the goal of a P&S investor is the hope of avoiding the downturn and then gain in the recovery to "buy" additional lifestyle.

-B
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willthrill81
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Re: My trend following strategy and experience

Post by willthrill81 »

Barsoom wrote: Thu Dec 05, 2019 1:10 pm
willthrill81 wrote: Thu Dec 05, 2019 12:53 pm
BlueEars wrote: Thu Dec 05, 2019 12:29 pm
tadamsmar wrote: Thu Dec 05, 2019 11:48 am
Forester wrote: Thu Dec 05, 2019 5:05 am It's funny that people on here chase their own tails over 3.5% vs 4% withdrawal rate, sequence of returns, bond tents etc etc, when there's strong evidence that even only 10% or 20% allocated to equity trend following would likely make their retirement plans more robust. There's no good reason for the concept of a "portfolio stop loss" not to gain traction other than superstitious beliefs.
Is there any reason to think that trend following in tax-deferred accounts is likely to make your retirement plan less robust?
There are some caveats to using trend following that could affect retirees. A few I can think of:
1) Don't adopt a poorly designed trend following approach. Any approach should take into account that sudden declines like October 1987 can happen.
2) Be sure you can implement the methodology for the long haul. You have to follow up even if you are ill or traveling or there is some disturbing life event going on that distracts you.
3) If you are having cognitive issues perhaps move to buy-hold and/or use an advisor.
To add to #2, you must be prepared to lag a buy-and-hold approach, perhaps for many years and especially in a strong bull market.
Correct me if I'm wrong, but would you say that the retiree world is actually very different from the saver world?

That is, the saver follows a "buy and hold" strategy for the 30+ years they are earning an income, but the retiree follows a "hold and sell" strategy during the 30 years they must live off of their savings?

As a retiree, to me "hold" also means "protect" and sell. A trend following strategy is about protecting my portfolio from anticipated drops when long-term indicators suggest a looming downturn in the economic environment. "Protecting" is important because I don't have a salary anymore to insulate me from the market recovery time.

To me, the risk as a retiree is that the downturn doesn't come and reentering the market costs the retiree the small period of growth between exit and reentry. This is mitigated to some degree by the portion of the retiree portfolio that is in equities vs bonds, meaning that the retiree my have less equity exposure than the B&H investor has.

-B
It's commonly accepted that, at least in the first ten years or so of retirement, that retirees' portfolios should generally be more conservative than an accumulator's, especially a young one. Standard BH advice is to achieve this via a significant allocation to fixed income. The approach laid out here is to attempt to avoid exposure to stocks when they seem to be at greatest risk of a significant decline. So the goal might be the same, though the means are very distinct.
“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 Galton's Ghost »

Exactly. The first 10 years of retirement are the danger zone. Wade Pfau (I think) and others have argued that you should start retirement overwhelmingly in bonds and then slowly move to stocks as you age to protect yourself against sequence risk. But almost no retirees are going to accept moving to 70% or 80% stocks at 75 or 80. It's ridiculous.

Trend following accomplishes the same thing but in a more realistic way.
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Re: My trend following strategy and experience

Post by Galton's Ghost »

garlandwhizzer wrote: Wed Dec 04, 2019 2:03 pm
From the article:

A word of caution

This strategy only holds one asset at any given time, which historically has resulted in extremely high returns, but could also lead to extremely high portfolio volatility and potential for loss.
There is also the problem that 100% of the portfolio is changed as often as every month. This generates huge trading costs and frictions which are of course totally neglected in the backtesting model. Likewise in a taxable account it generates huge short term capital gains which carry the same high tax burden as ordinary income in contrast to long term capital gains which receive preferential tax treatment for those who hold assets longer than 12 months. Backtesting models carefully ignore these considerations. In addition they ignore the increase complexity and work involved in making 100% changes in the portfolio as often as a monthly basis. There is also the point that past strong returns on this or any other backtesting model may not reliably translate into future strong returns. The future of markets has a very limited degree of reliable predictably.

Backtesting models are intellectually fascinating and get those who derive them promotions in academia and huge income for those who create, market, and sell them in the form of funds/management. It is very easy to understand why they are generated so frequently. Literally hundreds of investment factors and countless trading strategies have been identified. Their major real effects of all this research have been to generate promotions for those academics who "discover" them from data mining and to generate exorbitant income for those who create, market, and sell them to the public.

It is quite simple to construct a winning portfolio with data mining given assumptions of no trading costs, no trading frictions, no management costs, no marketing costs, and especially in the case of factors cost-free long/short portfolios that automatically magnify positive results by 100%. Anyone who can do arithmetic can do that over any time period. The evidence that any of these models have worked consistently in practice rather than in these unrealistic models from which they are derived is scant. It seems to me that a bit of skepticism is in order when viewing each new piece of the newly discovered magic secret investing sauce which seems to appear with increasing frequency as time passes.

People very much prefer certainty even if it is wrong to admitting uncertainty up front. Romans and other ancients studied sacrificed sheep entrails the night before a great battle to see if the gods would lead them on to victory. Since the general or a priest knowing the general's will was doing the interpretation, the answer was usually yes if the general actually wanted the battle and no if he didn't want it. Still in spite of this ruse, soldiers maintained their faith in these omens year after year for centuries. Those who seek predictability about the future are often much happier with false certainty than with true uncertainty. IMO there is some degree of parallel between the reading of sheep entrails and the ever increasing production of investing secret sauces from academics and the fund industry. It is up to the Individual investor to separate the wheat from the chaff, but most of us should keep in mind that our brains are wired to magnify wheat and neglect chaff.

Garland Whizzer

First, regarding trading costs and frictions:

1. The number of trades per year under this system are small.
2. The system uses some of the most liquid ETFs in the world, i.e. the bid-ask spread is basically zero

Therefore, this is an extremely cheap system to implement - if done in a tax-deferred account - probably similar to B&H.

Second, I think that you're missing a very big point. Because of the combination of economic indicator and trend screen, this strategy is in stocks ~85% of the time. So, let's assume that the whole strategy is baloney. The market is random and trend doesn't work. That would mean that Will's returns will be the same as though he invested in 85% stocks and 15% bonds. Also, since his trading costs are close to zero and he's using extremely cheap mutual funds/ETFs, he won't lose practically any more than a typical Boglehead. Again, he'll earn very close what a typical Boglehead would earn on an 85% stock, 15% bond portfolio. Not bad.

What I'm saying is that Will's "Strategy Risk" i.e. the danger that his economic indicator/trend screen is baloney, is very, very low. Maybe he doesn't want the risk level of an 85/15 portfolio, but other than that, his system is cheap and simple, much like a typical Boglehead portfolio.
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Re: My trend following strategy and experience

Post by willthrill81 »

Below are the results from my trend following strategy in 2019.

2019 Results
Total return 18.7%


Comparisons
VTSAX = 30.80%
VTIAX = 21.51%
VSMGX (Vanguard LifeStrategy Moderate Growth 60/40) = 19.37%


Summary
The strategy experienced a whipsaw between January and February this year. The movement out of stocks was triggered by the combined bear market beginning in 2018 and the short-lived uptick in the unemployment rate. Experiencing the whipsaw has not shaken my confidence in the strategy nor my resolution to strictly adhere to it going forward. I knew that this would happen at some point and said so here. Plus, it's difficult for me to be too upset with a nearly 19% one year return. :wink:

Aside from the brief period out of stocks, the strategy was invested almost exclusively in large-cap growth stock and/or mid-cap growth stock. Right now, I'm 100% in large-cap growth stock and will remain there until at least February.
“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 H-Town »

willthrill81 wrote: Wed Jan 01, 2020 11:58 am Below are the results from my trend following strategy in 2019.

2019 Results
Total return 18.7%
It's a good year for stock market. Does your rate of return account for the DCA / monthly contribution during the year? Most of the accumulators don't have the full balance at the beginning of the year. As such, it would lower the rate of return compared to the index benchmark when the market was going up.
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Re: My trend following strategy and experience

Post by willthrill81 »

H-Town wrote: Wed Jan 01, 2020 12:01 pm
willthrill81 wrote: Wed Jan 01, 2020 11:58 am Below are the results from my trend following strategy in 2019.

2019 Results
Total return 18.7%
It's a good year for stock market. Does your rate of return account for the DCA / monthly contribution during the year? Most of the accumulators don't have the full balance at the beginning of the year. As such, it would lower the rate of return compared to the index benchmark when the market was going up.
That's a good question. Yes, my returns take DCA into account.
“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 Barsoom »

Interestingly, that whipsaw was singly indicated in each of the three months based on the full strategy from the original linked article.
  • November 2018 - Personal Income Growth was triggered at 2.73% (must be > 3%).
  • December 2018 - Retail Sales Growth was triggered at -0.54% (must be > 0%).
  • January 2019 - Unemployment Growth was 2.78% over its TTM average (must be < 0%).
In each of the three months of the whipsaw, there were no other corroborating indicators. This is the risk of using single indicators that are not wholly indicative of a recession trend. All prior recessions had a majority (if not totality) of indicators triggering before the S&P 500 indicator triggered.

-B
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Re: My trend following strategy and experience

Post by willthrill81 »

Barsoom wrote: Wed Jan 01, 2020 12:06 pm Interestingly, that whipsaw was singly indicated in each of the three months based on the full strategy from the original linked article.
  • November 2018 - Personal Income Growth was triggered at 2.73% (must be > 3%).
  • December 2018 - Retail Sales Growth was triggered at -0.54% (must be > 0%).
  • January 2019 - Unemployment Growth was 2.78% over its TTM average (must be < 0%).
In each of the three months of the whipsaw, there were no other corroborating indicators. This is the risk of using single indicators that are not wholly indicative of a recession trend. All prior recessions had a majority (if not totality) of indicators triggering before the S&P 500 indicator triggered.

-B
To reiterate, my strategy does not use a single indicator. It uses two, the 7 month moving average of stocks and the 12 month moving average of the unemployment rate.

I will admit that using a large number of indicators might lead to better long-term results. But I am unsure of how to (1) deal with the issue that not all indicators have been equally effective in forecasting a recession, (2) many of the indicators do not have a long history, and (3) incorporate all of them into a completely objective, rules-based system.
“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 BlueEars »

Good outcome Will. It will be fun to watch this thread over the year's. I admire your resolve.
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Re: My trend following strategy and experience

Post by Barsoom »

I should have been clearer. The 7MMA of stocks is the main trigger, but only if one or more of the others also triggers. Those others by themselves do not trigger action.

My point is that, while the unemployment indicator is the strongest of the indicators, no recent prior recession was indicated by only one additional trigger.

-B
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Re: My trend following strategy and experience

Post by willthrill81 »

Barsoom wrote: Wed Jan 01, 2020 12:28 pm My point is that, while the unemployment indicator is the strongest of the indicators, no recent prior recession was indicated by only one additional trigger.
The key word there is "recent." I'm not convinced with very limited data on many other indicators how reliable they will be going forward. Conversely, we have a lot more data regarding (and I have a lot more confidence in) the ability of the UER to indicate the likelihood of an upcoming recession.
“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 willthrill81 »

BlueEars wrote: Wed Jan 01, 2020 12:21 pm Good outcome Will. It will be fun to watch this thread over the year's. I admire your resolve.
Thanks! :beer
“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 DB2 »

willthrill81 wrote: Wed Jan 01, 2020 11:58 am Below are the results from my trend following strategy in 2019.

2019 Results
Total return 18.7%


Comparisons
VTSAX = 30.80%
VTIAX = 21.51%
VSMGX (Vanguard LifeStrategy Moderate Growth 60/40) = 19.37%


Summary
The strategy experienced a whipsaw between January and February this year. The movement out of stocks was triggered by the combined bear market beginning in 2018 and the short-lived uptick in the unemployment rate. Experiencing the whipsaw has not shaken my confidence in the strategy nor my resolution to strictly adhere to it going forward. I knew that this would happen at some point and said so here. Plus, it's difficult for me to be too upset with a nearly 19% one year return. :wink:

Aside from the brief period out of stocks, the strategy was invested almost exclusively in large-cap growth stock and/or mid-cap growth stock. Right now, I'm 100% in large-cap growth stock and will remain there until at least February.
Thanks for posting this as I was curious how the approach would play out this year.

60/40 funds have caught my eye as of late (for behavioral and AA purposes/preferences).

Vanguard's Wellington, Wellington Global, VBIAX (Balanced Index), and STAR (all roughly 60/40 funds) were in the ~22% range for comparison against VSMGX. I'm not sure why VSMGX did a few points lower. At first thought it's International, but Wellington Global is a bit more than 50% International and STAR is around 30% in equity International if I recall - although these are active funds and perhaps they were the edge here for 2019 over passive.
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Re: My trend following strategy and experience

Post by guyinlaw »

DB2 wrote: Wed Jan 01, 2020 1:59 pm

60/40 funds have caught my eye as of late (for behavioral and AA purposes/preferences).

Vanguard's Wellington, Wellington Global, VBIAX (Balanced Index), and STAR (all roughly 60/40 funds) were in the ~22% range for comparison against VSMGX. I'm not sure why VSMGX did a few points lower. At first thought it's International, but Wellington Global is a bit more than 50% International and STAR is around 30% in equity International if I recall - although these are active funds and perhaps they were the edge here for 2019 over passive.
Did you consider NTSX, the 90/60 Balanced ETF?

It holds
90% -- S&P 500
10% -- cash and treasury futures givings exposure to 60% T-Bonds

https://www.portfoliovisualizer.com/bac ... ion4_1=-50
Time is your friend; impulse is your enemy. - John C. Bogle
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Re: My trend following strategy and experience

Post by willthrill81 »

guyinlaw wrote: Wed Jan 01, 2020 2:54 pm
DB2 wrote: Wed Jan 01, 2020 1:59 pm

60/40 funds have caught my eye as of late (for behavioral and AA purposes/preferences).

Vanguard's Wellington, Wellington Global, VBIAX (Balanced Index), and STAR (all roughly 60/40 funds) were in the ~22% range for comparison against VSMGX. I'm not sure why VSMGX did a few points lower. At first thought it's International, but Wellington Global is a bit more than 50% International and STAR is around 30% in equity International if I recall - although these are active funds and perhaps they were the edge here for 2019 over passive.
Did you consider NTSX, the 90/60 Balanced ETF?

It holds
90% -- S&P 500
10% -- cash and treasury futures givings exposure to 60% T-Bonds

https://www.portfoliovisualizer.com/bac ... ion4_1=-50
In that backtest, the risk-adjusted return of 90/60 AA was slightly lower than that of a 60/30/10, never mind that the 90/60 would have higher ERs.
“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 »

willthrill81 wrote: Thu Dec 05, 2019 12:53 pm
BlueEars wrote: Thu Dec 05, 2019 12:29 pm
tadamsmar wrote: Thu Dec 05, 2019 11:48 am
Forester wrote: Thu Dec 05, 2019 5:05 am It's funny that people on here chase their own tails over 3.5% vs 4% withdrawal rate, sequence of returns, bond tents etc etc, when there's strong evidence that even only 10% or 20% allocated to equity trend following would likely make their retirement plans more robust. There's no good reason for the concept of a "portfolio stop loss" not to gain traction other than superstitious beliefs.
Is there any reason to think that trend following in tax-deferred accounts is likely to make your retirement plan less robust?
There are some caveats to using trend following that could affect retirees. A few I can think of:
1) Don't adopt a poorly designed trend following approach. Any approach should take into account that sudden declines like October 1987 can happen.
2) Be sure you can implement the methodology for the long haul. You have to follow up even if you are ill or traveling or there is some disturbing life event going on that distracts you.
3) If you are having cognitive issues perhaps move to buy-hold and/or use an advisor.
To add to #2, you must be prepared to lag a buy-and-hold approach, perhaps for many years and especially in a strong bull market.
And to add to #1, something new could happen which, in hindsight, means your trend-following approach was poorly designed.

That's the risk trend-followers seems to ignore. The future may not match the past close enough for your signals to work.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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Re: My trend following strategy and experience

Post by willthrill81 »

HomerJ wrote: Wed Jan 01, 2020 6:22 pm
willthrill81 wrote: Thu Dec 05, 2019 12:53 pm
BlueEars wrote: Thu Dec 05, 2019 12:29 pm
tadamsmar wrote: Thu Dec 05, 2019 11:48 am
Forester wrote: Thu Dec 05, 2019 5:05 am It's funny that people on here chase their own tails over 3.5% vs 4% withdrawal rate, sequence of returns, bond tents etc etc, when there's strong evidence that even only 10% or 20% allocated to equity trend following would likely make their retirement plans more robust. There's no good reason for the concept of a "portfolio stop loss" not to gain traction other than superstitious beliefs.
Is there any reason to think that trend following in tax-deferred accounts is likely to make your retirement plan less robust?
There are some caveats to using trend following that could affect retirees. A few I can think of:
1) Don't adopt a poorly designed trend following approach. Any approach should take into account that sudden declines like October 1987 can happen.
2) Be sure you can implement the methodology for the long haul. You have to follow up even if you are ill or traveling or there is some disturbing life event going on that distracts you.
3) If you are having cognitive issues perhaps move to buy-hold and/or use an advisor.
To add to #2, you must be prepared to lag a buy-and-hold approach, perhaps for many years and especially in a strong bull market.
And to add to #1, something new could happen which, in hindsight, means your trend-following approach was poorly designed.

That's the risk trend-followers seems to ignore. The future may not match the past close enough for your signals to work.
I don't think that most of us ignore it at all. I understand that risk full well. Similarly, I should hope that most buy-and-holders understand that their fate is beholden to that of the markets'. If they work like the U.S.'s has for most of the last 30 years, then they'll probably do great. If they work like Japan's has for the last 30 years, then they'll probably be in serious trouble.

The question then becomes which risk is greater, and that's largely a matter of personal opinion. For that reason, I never deride those who choose the buy-and-hold path and, in fact, I specifically recommend that others follow that approach because I believe that most are better suited for 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 Always passive »

willthrill81 wrote: Wed Jan 01, 2020 6:27 pm
HomerJ wrote: Wed Jan 01, 2020 6:22 pm
willthrill81 wrote: Thu Dec 05, 2019 12:53 pm
BlueEars wrote: Thu Dec 05, 2019 12:29 pm
tadamsmar wrote: Thu Dec 05, 2019 11:48 am

Is there any reason to think that trend following in tax-deferred accounts is likely to make your retirement plan less robust?
There are some caveats to using trend following that could affect retirees. A few I can think of:
1) Don't adopt a poorly designed trend following approach. Any approach should take into account that sudden declines like October 1987 can happen.
2) Be sure you can implement the methodology for the long haul. You have to follow up even if you are ill or traveling or there is some disturbing life event going on that distracts you.
3) If you are having cognitive issues perhaps move to buy-hold and/or use an advisor.
To add to #2, you must be prepared to lag a buy-and-hold approach, perhaps for many years and especially in a strong bull market.
And to add to #1, something new could happen which, in hindsight, means your trend-following approach was poorly designed.

That's the risk trend-followers seems to ignore. The future may not match the past close enough for your signals to work.
I don't think that most of us ignore it at all. I understand that risk full well. Similarly, I should hope that most buy-and-holders understand that their fate is beholden to that of the markets'. If they work like the U.S.'s has for most of the last 30 years, then they'll probably do great. If they work like Japan's has for the last 30 years, then they'll probably be in serious trouble.

The question then becomes which risk is greater, and that's largely a matter of personal opinion. For that reason, I never deride those who choose the buy-and-hold path and, in fact, I specifically recommend that others follow that approach because I believe that most are better suited for it.
Since you are testing only once a month, at the end of the month, to cover scenarios like oct 1987, it seems to me that on top of your strategy, you could carry a continuous stop loss (say 10-15% from beginning of the month price) for each of your invested risky assets. What do you think about that?
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Re: My trend following strategy and experience

Post by willthrill81 »

Always passive wrote: Wed Jan 01, 2020 10:55 pm
willthrill81 wrote: Wed Jan 01, 2020 6:27 pm
HomerJ wrote: Wed Jan 01, 2020 6:22 pm
willthrill81 wrote: Thu Dec 05, 2019 12:53 pm
BlueEars wrote: Thu Dec 05, 2019 12:29 pm

There are some caveats to using trend following that could affect retirees. A few I can think of:
1) Don't adopt a poorly designed trend following approach. Any approach should take into account that sudden declines like October 1987 can happen.
2) Be sure you can implement the methodology for the long haul. You have to follow up even if you are ill or traveling or there is some disturbing life event going on that distracts you.
3) If you are having cognitive issues perhaps move to buy-hold and/or use an advisor.
To add to #2, you must be prepared to lag a buy-and-hold approach, perhaps for many years and especially in a strong bull market.
And to add to #1, something new could happen which, in hindsight, means your trend-following approach was poorly designed.

That's the risk trend-followers seems to ignore. The future may not match the past close enough for your signals to work.
I don't think that most of us ignore it at all. I understand that risk full well. Similarly, I should hope that most buy-and-holders understand that their fate is beholden to that of the markets'. If they work like the U.S.'s has for most of the last 30 years, then they'll probably do great. If they work like Japan's has for the last 30 years, then they'll probably be in serious trouble.

The question then becomes which risk is greater, and that's largely a matter of personal opinion. For that reason, I never deride those who choose the buy-and-hold path and, in fact, I specifically recommend that others follow that approach because I believe that most are better suited for it.
Since you are testing only once a month, at the end of the month, to cover scenarios like oct 1987, it seems to me that on top of your strategy, you could carry a continuous stop loss (say 10-15% from beginning of the month price) for each of your invested risky assets. What do you think about that?
I don't have that option in most of my accounts, so it's not even an option for me.
“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 Global100 »

willthrill81 wrote: Wed Jan 01, 2020 11:58 am Below are the results from my trend following strategy in 2019.

2019 Results
Total return 18.7%


Comparisons
VTSAX = 30.80%
VTIAX = 21.51%
VSMGX (Vanguard LifeStrategy Moderate Growth 60/40) = 19.37%
Re: 18.7%

According to your TF plan, you were supposed to move your funds out of stocks earlier in January 2019 but forgot (see quote below). The equity markets were making some nice gains last January while your funds were not supposed to be invested in stocks. What is your TF's 2019 approximate annual return had you moved out of stocks on time? 15%-16%?
willthrill81 wrote: Fri Jan 18, 2019 2:12 pm
aristotelian wrote: Fri Jan 18, 2019 12:59 pmDid you get out of stocks on Jan 1?
No. The BLS data weren't released until later, and as I noted above, I didn't notice the change in the UER until earlier this week, so I was a little late to make the switch. I have reminders set up now to prevent this going forward.
Your TF had you move back into stocks in March 2019 and remain for the rest of 2019, I believe. However, your TF plan could've had you changing stock funds several times based on the 7mma (for example: from US Large Cap, to Mid Cap, to EM, then to back to Mid Cap). Did you change stock funds a few times in last three quarters of 2019? If so, did your newly bought stock fund usually have a higher return in the following month than the stock fund you had just sold? Thank you.
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Re: My trend following strategy and experience

Post by willthrill81 »

Global100 wrote: Wed Jan 01, 2020 11:25 pm
willthrill81 wrote: Wed Jan 01, 2020 11:58 am Below are the results from my trend following strategy in 2019.

2019 Results
Total return 18.7%


Comparisons
VTSAX = 30.80%
VTIAX = 21.51%
VSMGX (Vanguard LifeStrategy Moderate Growth 60/40) = 19.37%
Re: 18.7%

According to your TF plan, you were supposed to move your funds out of stocks earlier in January 2019 but forgot (see quote below). The equity markets were making some nice gains last January while your funds were not supposed to be invested in stocks. What is your TF's 2019 approximate annual return had you moved out of stocks on time? 15%-16%?
Good point. It would have been about 14%.
Global100 wrote: Wed Jan 01, 2020 11:25 pm
willthrill81 wrote: Fri Jan 18, 2019 2:12 pm
aristotelian wrote: Fri Jan 18, 2019 12:59 pmDid you get out of stocks on Jan 1?
No. The BLS data weren't released until later, and as I noted above, I didn't notice the change in the UER until earlier this week, so I was a little late to make the switch. I have reminders set up now to prevent this going forward.
Your TF had you move back into stocks in March 2019 and remain for the rest of 2019, I believe. However, your TF plan could've had you changing stock funds several times based on the 7mma (for example: from US Large Cap, to Mid Cap, to EM, then to back to Mid Cap). Did you change stock funds a few times in last three quarters of 2019? If so, did your newly bought stock fund usually have a higher return in the following month than the stock fund you had just sold? Thank you.
The last trade I made was in early September, which I moved from MCG to LCG. I'd have to go back and look, but I believe that I was only in EM for one month in 2019 and was in MCG and LCG the rest of the year. Both MCG (33.86% for VMGMX)and LCG (37.23% for VIGAX) significantly outperformed the S&P 500 in 2019, so that helped to close some of the gap created by the whipsaw.
“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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sergeant
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Re: My trend following strategy and experience

Post by sergeant »

I thought the comparison portfolio is 85/15?
AA- 20+ Years of Expenses Fixed Income/The remainder in Equities.
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willthrill81
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Re: My trend following strategy and experience

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sergeant wrote: Thu Jan 02, 2020 12:06 am I thought the comparison portfolio is 85/15?
Yes, I forgot to include that one. An 85/15 returned 27.49% in 2019 (Vanguard Admiral shares).
“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
Global100
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Re: My trend following strategy and experience

Post by Global100 »

willthrill81 wrote: Wed Jan 01, 2020 11:37 pm The last trade I made was in early September, which I moved from MCG to LCG. I'd have to go back and look, but I believe that I was only in EM for one month in 2019 and was in MCG and LCG the rest of the year. Both MCG (33.86% for VMGMX)and LCG (37.23% for VIGAX) significantly outperformed the S&P 500 in 2019, so that helped to close some of the gap created by the whipsaw.
Thanks.

Say that you could stomach market downturns/wait for recovery A LOT more than you could stomach whipsaws. (i.e. you would not use the UER as an indicator to switch to fixed income; you stay invested according to your AA). Maybe you would then have some bonds in your tax deferred accounts, but for your stock allocation: would you still follow the 7mma aspect to decide whether to change from one stock index fund to another stock index fund each month?
Last edited by Global100 on Thu Jan 02, 2020 1:26 am, edited 1 time in total.
Lee_WSP
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Re: My trend following strategy and experience

Post by Lee_WSP »

Would the UE trigger be more robust if you used the revised data instead of the preliminary data release? Obviously it would lose some timeliness if an actual recession were to hit. What about waiting for two months of 12mma UE?
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HomerJ
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Re: My trend following strategy and experience

Post by HomerJ »

willthrill81 wrote: Wed Jan 01, 2020 6:27 pm
HomerJ wrote: Wed Jan 01, 2020 6:22 pm
willthrill81 wrote: Thu Dec 05, 2019 12:53 pm
BlueEars wrote: Thu Dec 05, 2019 12:29 pm
tadamsmar wrote: Thu Dec 05, 2019 11:48 am

Is there any reason to think that trend following in tax-deferred accounts is likely to make your retirement plan less robust?
There are some caveats to using trend following that could affect retirees. A few I can think of:
1) Don't adopt a poorly designed trend following approach. Any approach should take into account that sudden declines like October 1987 can happen.
2) Be sure you can implement the methodology for the long haul. You have to follow up even if you are ill or traveling or there is some disturbing life event going on that distracts you.
3) If you are having cognitive issues perhaps move to buy-hold and/or use an advisor.
To add to #2, you must be prepared to lag a buy-and-hold approach, perhaps for many years and especially in a strong bull market.
And to add to #1, something new could happen which, in hindsight, means your trend-following approach was poorly designed.

That's the risk trend-followers seems to ignore. The future may not match the past close enough for your signals to work.
I don't think that most of us ignore it at all. I understand that risk full well. Similarly, I should hope that most buy-and-holders understand that their fate is beholden to that of the markets'. If they work like the U.S.'s has for most of the last 30 years, then they'll probably do great. If they work like Japan's has for the last 30 years, then they'll probably be in serious trouble.

The question then becomes which risk is greater, and that's largely a matter of personal opinion. For that reason, I never deride those who choose the buy-and-hold path and, in fact, I specifically recommend that others follow that approach because I believe that most are better suited for it.
I very much agree with you.

I just had to point out that "#1 - Don't adopt a poorly designed trend following approach" is a lot harder than most people think.

EVERY system that has failed in the past back-tested well at one point, but then something new happened that broke the system. At which point, after the fact, the system was determined to be a "poorly designed" system. Which is, of course, too late.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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Re: My trend following strategy and experience

Post by willthrill81 »

Global100 wrote: Thu Jan 02, 2020 1:13 am
willthrill81 wrote: Wed Jan 01, 2020 11:37 pm The last trade I made was in early September, which I moved from MCG to LCG. I'd have to go back and look, but I believe that I was only in EM for one month in 2019 and was in MCG and LCG the rest of the year. Both MCG (33.86% for VMGMX)and LCG (37.23% for VIGAX) significantly outperformed the S&P 500 in 2019, so that helped to close some of the gap created by the whipsaw.
Thanks.

Say that you could stomach market downturns/wait for recovery A LOT more than you could stomach whipsaws. (i.e. you would not use the UER as an indicator to switch to fixed income; you stay invested according to your AA). Maybe you would then have some bonds in your tax deferred accounts, but for your stock allocation: would you still follow the 7mma aspect to decide whether to change from one stock index fund to another stock index fund each month?
That would be a plausible option.
“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 willthrill81 »

Lee_WSP wrote: Thu Jan 02, 2020 1:25 am Would the UE trigger be more robust if you used the revised data instead of the preliminary data release? Obviously it would lose some timeliness if an actual recession were to hit. What about waiting for two months of 12mma UE?
I value time more than pinpoint accuracy, especially since my strategy does not act on the UER alone. Historically, the time between the UER crossing its 12 MMA and the onset of the recessions has been a little as zero months (i.e. they coincided). Delaying for another month could mean that you were already well into the recession before you acted, which could be worse than having done nothing at all. While this system will not, by definition, sell at the peak, you certainly don't want to sell at the bottom of the trough either.
“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 longinvest »

This is noteworthy!
willthrill81 wrote: Wed Jan 01, 2020 11:37 pm
Global100 wrote: Wed Jan 01, 2020 11:25 pm According to your TF plan, you were supposed to move your funds out of stocks earlier in January 2019 but forgot (see quote below). The equity markets were making some nice gains last January while your funds were not supposed to be invested in stocks. What is your TF's 2019 approximate annual return had you moved out of stocks on time? 15%-16%?
Good point. It would have been about 14%.
willthrill81 wrote: Thu Jan 02, 2020 12:33 am
sergeant wrote: Thu Jan 02, 2020 12:06 am I thought the comparison portfolio is 85/15?
Yes, I forgot to include that one. An 85/15 returned 27.49% in 2019 (Vanguard Admiral shares).
Two measurement errors hiding that the proposed market-timing approach has underperformed its benchmark by 14% in 2019!

There's a lot of wisdom in the Never try to time the market Bogleheads principle (video):
There is a large amount of research showing that typical mutual fund investors actually perform far worse than the mutual funds they invest in because they tend to buy after a fund has done well and tend to sell what they own when it has done poorly. Studies on timing using returns data show no evidence of positive timing. The vast majority of investors earn less than the market due to two common timing mistakes: buying yesterday's top performers, and letting your emotions cause you to attempt to predict the direction of the stock market. This behavior of buy high, sell low is guaranteed to produce poor results.

Instead, Bogleheads create a good plan and then stick with it, which consistently produces good outcomes over the long term.
I think that the mistake of the original poster (OP) was to consider a 85/15 stocks/bonds target as a "good plan" for someone so loss-averse as the OP is. I suggest to consider, instead, adopting a significantly more conservative allocation target appropriate for a loss-averse person as provided by the Vanguard Target Retirement Income Fund (VTINX), a globally-diversified indexed One-Fund Portfolio with a 30/70 stocks/bonds allocation, which returned 13% in 2019. If the OP is confident to reach his financial objectives with a 14% return using a market-timed approach in 2019, I see no reason for him not to reach them with a boring low-stocks one-fund portfolio without any market timing.

Good luck!
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