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 » Thu Feb 14, 2019 3:58 pm

Always passive wrote:
Thu Feb 14, 2019 3:43 pm
Why do you use a moving average to stay or not in the market, and momentum to pick the asset and not Gary Antonacci's dual momentum?
Simplicity, for one. I'm also not convinced that a dual momentum approach would have consistently better short-term or long-term results.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: My trend following strategy and experience

Post by BB76 » Thu Feb 14, 2019 4:06 pm

I apologize if this question is more appropriate for another thread, but I've been considering using a version of Dual Momentum with a portion of my portfolio. My question: Have you ever researched and/or considered using leveraged funds rather than pure index funds? I have not done enough research on the topic in general nor know if there would be sufficient funds available to have all sectors available if one decided to rotate sectors, but it does seem as though overall risk could be mitigated by allocating a smaller portion of the total portfolio to the momentum strategy while holding the balance in a more conservative aa.

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Re: My trend following strategy and experience

Post by Carol88888 » Thu Feb 14, 2019 4:24 pm

Thank you for posting. I appreciate your hard work.

Also, I feel same about buy and hold - it's hard to stand pat when the market keeps going down. My approach so far has been to have a ready supply of cash coming in (dividends) that I can redeploy when times are bad. I am trying to make my Vanguard investments buy and hold but leave my Schwab account actively managed. So in a way I am doing a little study as to which does best. I have the feeling I would have done better by having it all at Vanguard over the last 5 years.

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Re: My trend following strategy and experience

Post by 305pelusa » Thu Feb 14, 2019 5:20 pm

bluquark wrote:
Thu Jan 17, 2019 8:35 pm
It has crossed my mind that a strategy of being 100% stocks on odd-numbered months and 100% bonds on even-numbered months probably has a risk/return profile similar to a 50/50 allocation, modulo the extreme up or down months that come now and then in history. Likewise your strategy probably will have similar returns to a conventional 85/15 allocation.
I have not read the entire thread so I'm not sure if this has been answered. From a mathematical point of view, if one randomly moves between 100% bonds/stocks (or like you said, based on the months), your expected (aka average) return should be similar.

The issue is that your volatility is much higher now. Whereas the 50/50 captures exactly half of the gains and losses of each asset though the period, switching from one to the other now adds the possibility of getting most of the gains OR most of the losses.

That's an increased volatility at the same expected return. Which, due to volatility drag, means you now have a decreased compounded return.

This is very similar to how adding assets that have identical returns, but non-zero correlation, decreases volatility and it's that decreased volatility that generates higher returns.

So no, I don't think being in the market fully in stocks 85% of the time is analogous to being 85% invested in stocks, all the time. If you simulated that with random variables, the former distribution will have an increased standard deviation.

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Re: My trend following strategy and experience

Post by willthrill81 » Thu Feb 14, 2019 7:44 pm

BB76 wrote:
Thu Feb 14, 2019 4:06 pm
I apologize if this question is more appropriate for another thread, but I've been considering using a version of Dual Momentum with a portion of my portfolio. My question: Have you ever researched and/or considered using leveraged funds rather than pure index funds? I have not done enough research on the topic in general nor know if there would be sufficient funds available to have all sectors available if one decided to rotate sectors, but it does seem as though overall risk could be mitigated by allocating a smaller portion of the total portfolio to the momentum strategy while holding the balance in a more conservative aa.
Leverage, even a leveraged fund, gives me the heebee-jeebees.

I think that dual momentum is a fine strategy, but I chose to avoid it for the purpose of simplification.
“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 » Thu Feb 14, 2019 7:48 pm

305pelusa wrote:
Thu Feb 14, 2019 5:20 pm
bluquark wrote:
Thu Jan 17, 2019 8:35 pm
It has crossed my mind that a strategy of being 100% stocks on odd-numbered months and 100% bonds on even-numbered months probably has a risk/return profile similar to a 50/50 allocation, modulo the extreme up or down months that come now and then in history. Likewise your strategy probably will have similar returns to a conventional 85/15 allocation.
I have not read the entire thread so I'm not sure if this has been answered. From a mathematical point of view, if one randomly moves between 100% bonds/stocks (or like you said, based on the months), your expected (aka average) return should be similar.

The issue is that your volatility is much higher now. Whereas the 50/50 captures exactly half of the gains and losses of each asset though the period, switching from one to the other now adds the possibility of getting most of the gains OR most of the losses.

That's an increased volatility at the same expected return. Which, due to volatility drag, means you now have a decreased compounded return.

This is very similar to how adding assets that have identical returns, but non-zero correlation, decreases volatility and it's that decreased volatility that generates higher returns.

So no, I don't think being in the market fully in stocks 85% of the time is analogous to being 85% invested in stocks, all the time. If you simulated that with random variables, the former distribution will have an increased standard deviation.
The analogy isn't exact, to be sure, but being in the market as much as this strategy has tended to is unlikely to result in much added volatility. The more time spent out of the market, the higher the expected difference in volatility would be (e.g. a 50/50 strategy, in terms of time in/out of the market, would be expected to have a greater volatility difference than a 99/1).

Besides, a key aspect of trend following systems is to at least attempt to avoid the most volatile periods in stocks. Consequently, I expect my long-term volatility to be lower than that of an 85/15 portfolio. But I accept that this might not happen.
“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 305pelusa » Thu Feb 14, 2019 9:19 pm

willthrill81 wrote:
Thu Feb 14, 2019 7:48 pm

The analogy isn't exact, to be sure, but being in the market as much as this strategy has tended to is unlikely to result in much added volatility. The more time spent out of the market, the higher the expected difference in volatility would be (e.g. a 50/50 strategy, in terms of time in/out of the market, would be expected to have a greater volatility difference than a 99/1).
I'm comparing a strategy that spends X% of the time period invested fully stocks versus a strategy that invest X% of its money in stocks, the whole time. The former will have a larger standard deviation simply because you don't see all the results; one can make a proof with standard deviation but the conceptual explanation of my above posts (the possibility of racking more or less gains) is hopefully enough. It's also why standard deviation decreases with increased sample size.

What you're saying is that the increase in volatility is smallest when close to 100%. I agree with you. Mathematically, that makes sense.

But to what order the effect is, I don't know. It might be that the added volatility due to the effect I previously described is strongest at 50/50 up to 90/10 on both ends of the strategy and then quickly falls off. Or it might be biggest near 50/50 +-5 and quickly rolls off. It might be linear. Since st. dev. of an estimator variable goes down linearly with increased sample size, linear doesn't sound too crazy.
willthrill81 wrote:
Thu Feb 14, 2019 7:48 pm

Besides, a key aspect of trend following systems is to at least attempt to avoid the most volatile periods in stocks. Consequently, I expect my long-term volatility to be lower than that of an 85/15 portfolio. But I accept that this might not happen.
To be clear, I was only talking about doing it at random (the poster said on even/odd months). The undersampling of that strategy increases the range of possible results and the volatility (I think you understand it well though). Here's something that I think you will like:

If it's not done at random, the above might not apply. If you somehow could tell every year the stocks returned 5% and only invested then, your standard deviation/volatility would be zero. Now there isn't a strategy that could make you avoid only big losses but still get the wins (I think you know this and aren't trying to do that... that would be true market timing).

But there could theoretically be a strategy that avoids big losses AND big wins such that the expected returns are slightly lower. They can't be the same returns as that would be the same return with less volatility .i.e. free lunch. But if it was slightly lower return, then it's still consistent with an Efficient Market and a large investment community looking for inefficiencies.

So here's what I'm thinking about your specific strategy: If it manages to keep you out of more volatile times, then I think your returns will be somewhat lower (which I think is a very reasonable objective of your strategy and consistent with your goals). If your returns are better, I'd say it's just luck (or heck, maybe you did find something no one else has really tried).

But there needs to be a procedure to ensure you don't get the big volatile times. And you gotta be very reasonably confident it works. Because if it doesn't, and you still happen to hit the more volatile times, then you start approximating the random variables from the discussion above. That means higher volatility and lower compounded returns.

I don't know the first thing about predicting volatility. But like I said before, I could believe there is a strategy that avoids both big losses and big gains. Such a strategy would only invest in stocks once one is highly confident they are going up and get out of stocks at the first thought that they might be going down. I'm not sure if your strategy emulates that but if it did, it'd make sense to me at least :happy

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Re: My trend following strategy and experience

Post by Always passive » Fri Feb 15, 2019 12:26 am

Which platform do you use to extract historical data for the ETFs? I have looked at Portfolio Visualizer and I cannot see an application that gives you relative momentum between ETFs, funds, etc.

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Re: My trend following strategy and experience

Post by willthrill81 » Fri Feb 15, 2019 12:34 am

Always passive wrote:
Fri Feb 15, 2019 12:26 am
Which platform do you use to extract historical data for the ETFs? I have looked at Portfolio Visualizer and I cannot see an application that gives you relative momentum between ETFs, funds, etc.
I use Portfolio Visualizer. This is the page 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 » Fri Feb 15, 2019 12:57 am

I am very interesting in your strategy because as a retired investor I am always fearful of major market falls. I just do not have 5 or more years to get back to where I was just before the fall. The part what you have added which is a bit riskier is using relative strength to pick only ones ETF to hold each month. Have you compared the results of your strategy to dual momentum for your first full year (2018)?
Lastly, I think that this strategy will be much less efficient if you apply it in a taxable account (Do you agree?). And following the Bogleheads passive strategy I have all my equity in taxable with my fixed income in IRAs.
Good luck on your experiment.

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Re: My trend following strategy and experience

Post by Forester » Fri Feb 15, 2019 3:58 am

If willthrill81 is in stocks 80% and bonds 20% of the time, I expect he will out-perform an annually rebalanced 80-20 portfolio. Surely that's a fair yardstick. Or 70-30, however it pans out. Probably closer to 20% bonds due to the unemployment filter.

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Re: My trend following strategy and experience

Post by 305pelusa » Fri Feb 15, 2019 8:05 am

Forester wrote:
Fri Feb 15, 2019 3:58 am
If willthrill81 is in stocks 80% and bonds 20% of the time, I expect he will out-perform an annually rebalanced 80-20 portfolio.
Why?

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Re: My trend following strategy and experience

Post by carol-brennan » Fri Feb 15, 2019 8:31 am

What's a trend?

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Re: My trend following strategy and experience

Post by carol-brennan » Fri Feb 15, 2019 8:33 am

Always passive wrote:
Fri Feb 15, 2019 12:57 am
I am very interesting in your strategy because as a retired investor I am always fearful of major market falls.
The key to not being fearful is adjusting your asset allocation to match your risk tolerance.

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Re: My trend following strategy and experience

Post by Always passive » Fri Feb 15, 2019 9:23 am

carol-brennan wrote:
Fri Feb 15, 2019 8:33 am
Always passive wrote:
Fri Feb 15, 2019 12:57 am
I am very interesting in your strategy because as a retired investor I am always fearful of major market falls.
The key to not being fearful is adjusting your asset allocation to match your risk tolerance.
You are only half right. In my case, I have enough to live until 120, and my allocation is just about right, if not too conservative. But 2008 was not fun and had nothing to do with the size of my wealth

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Re: My trend following strategy and experience

Post by willthrill81 » Fri Feb 15, 2019 10:36 am

Always passive wrote:
Fri Feb 15, 2019 12:57 am
I am very interesting in your strategy because as a retired investor I am always fearful of major market falls. I just do not have 5 or more years to get back to where I was just before the fall. The part what you have added which is a bit riskier is using relative strength to pick only ones ETF to hold each month. Have you compared the results of your strategy to dual momentum for your first full year (2018)?
Lastly, I think that this strategy will be much less efficient if you apply it in a taxable account (Do you agree?). And following the Bogleheads passive strategy I have all my equity in taxable with my fixed income in IRAs.
Good luck on your experiment.
I addressed dual momentum a few posts above. It's a fine strategy but more complicated than I want to take on.

This strategy could be used in a taxable account by zeroing your stock position with futures contracts rather than selling your 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

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Re: My trend following strategy and experience

Post by tadamsmar » Sat Feb 16, 2019 11:08 am

thx1138 wrote:
Wed Feb 06, 2019 11:24 am
Thanks for sharing Will.

As to the "is this Bogleheads" or not recall that the real fundamental basis to Bogle is the "costs matter hypothesis". As implemented the costs for this strategy are no different than "buy and hold". Bogle himself advocated many AA changes in various interviews that are easily interpreted as "market timing" by the more zealous on this forum. What matters is not paying excessive fees or excessively trading. This strategy clearly passes that test.
I think you are incorrectly stating Bogle's advice. In one Bogle interview I read, he did mention a 10% change in stock allocation. He did not actually advocate it, more like you could do this or not - he did not condemn it. But he also was adamant that you not totally sell out of stocks.

Willthrill81 suggests in this thread that you could buy futures instead of selling stock to implement trend following in a taxable account. I think that perhaps is more of a high fee strategy.
Note that "buy and hold" is not in fact "buy and hold" as typically implemented by Bogleheads. There is typically rebalancing and some sort of AA adjustment over time. A key point the article this strategy originates from makes is that this strategy over time is roughly an AA of 85/15. The only difference is that this AA is divided up in time. You spend 85% of your time in 100% equity and 15% of your time in 100% FI. This is essentially an extreme form of rebalancing. All rebalancing strategies involve either time thresholds or valuation thresholds to govern trades - this strategy is different in magnitude.

Again compared to typical rebalancing strategies this is still on the "simple" side of things. The monthly checks are no more onerous than checking typical rebalancing thresholds (like 5/25). The number of trades executed is no more - and likely actually less - than typical rebalancing strategies.
I think it's way too much of a stretch to equate this to rebalancing. It is not rebalancing to an AA. It is not rebalancing to a risk level. Rebalancing not done for regret minimization (Willthrill81's stated primary goal). Rebalancing can typically be accomplished without selling stocks or bonds in a taxable account because there is no 100% sellout. Rebalancing is done to stabilize risk, whereas trend following drastically changes stock exposure based on trailing averages.
Last edited by tadamsmar on Sat Feb 16, 2019 11:20 am, edited 1 time in total.

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Re: My trend following strategy and experience

Post by willthrill81 » Sat Feb 16, 2019 11:14 am

tadamsmar wrote:
Sat Feb 16, 2019 11:08 am
Willthrill81 suggests in this thread that you could buy futures instead of selling stock to implement trend following in a taxable account. I think that perhaps is more of a high free strategy.
I believe you meant "high fee strategy." Please correct me if I'm wrong.

All of my accounts are in tax-advantaged accounts, so I have no personal experience with using futures. But I know that some trend followers do, and it appears that the costs of using futures tends to be substantially lower than the capital gains taxes would be otherwise.
“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 » Sat Feb 16, 2019 11:20 am

willthrill81 wrote:
Sat Feb 16, 2019 11:14 am
tadamsmar wrote:
Sat Feb 16, 2019 11:08 am
Willthrill81 suggests in this thread that you could buy futures instead of selling stock to implement trend following in a taxable account. I think that perhaps is more of a high free strategy.
I believe you meant "high fee strategy." Please correct me if I'm wrong.

All of my accounts are in tax-advantaged accounts, so I have no personal experience with using futures. But I know that some trend followers do, and it appears that the costs of using futures tends to be substantially lower than the capital gains taxes would be otherwise.
You are correct that I meant "fee".

I was comparing the futures fees to the Boglehead strategy, not to an alternative higher cost way to accomplish trend following.

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Re: My trend following strategy and experience

Post by willthrill81 » Sat Feb 16, 2019 11:22 am

tadamsmar wrote:
Sat Feb 16, 2019 11:20 am
willthrill81 wrote:
Sat Feb 16, 2019 11:14 am
tadamsmar wrote:
Sat Feb 16, 2019 11:08 am
Willthrill81 suggests in this thread that you could buy futures instead of selling stock to implement trend following in a taxable account. I think that perhaps is more of a high free strategy.
I believe you meant "high fee strategy." Please correct me if I'm wrong.

All of my accounts are in tax-advantaged accounts, so I have no personal experience with using futures. But I know that some trend followers do, and it appears that the costs of using futures tends to be substantially lower than the capital gains taxes would be otherwise.
You are correct that I meant "fee".

I was comparing the futures fees to the Boglehead strategy, not to an alternative higher cost way to accomplish trend following.
Yes, it would certainly be more costly than buying and holding very low cost index funds.
“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 » Sun Feb 17, 2019 12:34 pm

willthrill81 wrote:
Thu Jan 17, 2019 7:16 pm
The primary reason I'm posting all of this is for the sake of those who have asked me to post when I moved out of stocks, as well as to serve as record of the experiment I'm doing. I know that my portfolio is a sort of guinea pig, and I know that the long-term results of my strategy may be poor. But I believe very firmly that this is a strategy that I can stick with, and even if my returns lag those of the market for a long time, I'm willing to do so because I believe that I am likely to have some kind of downside protection while hopefully not at the expense of sacrificing upside potential. I might not achieve this goal, but that's alright. We save approximately 50% of our gross income, and I frankly don't need great returns to become financially independent at a very respectable age. A 4% average real return should result in us being comfortably financially independent by the time I'm 55, and if that must be pushed back, that's fine too.
I have been thinking about whether this is an appropriate experiment. One does not need to actually invest to test an investment method. You can just keep records. The outcome of a mere experiment would have no impact on when and if your family becomes financially independent.

But perhaps this experiment is more like one of those experiments where researchers self-ingest a compound in order to determine its effect on the human mind. Any other experiment would not provide the data and a researcher cannot ethically administer a novel compound to another human. The Swiss scientist Albert Hoffman famously performed these types of experiments.

I guess end-point is primarily about whether you can stick with it, so you do have to experiment on yourself.

Some new Bogleheads (me, for instance) end up doing something like this. They set an asset allocation and find that they can't sleep, so they adjust the stocks down a bit. They learn how they react to market fluctuations. Hopefully, beforehand they did some research on the kind of portfolio fluctuations they should expect. I think the key is to understand that market fluctuation don't have a big impact on the projected success of a well-designed plan.

One advantage of the Boglehead approach is that it's just a range finding experiment. You just adjust your allocation, you don't have to give up being a Boglehead. But if one's experiment with trend-following is failing the test of one's own psychology is there a parameter you can tweak?

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Re: My trend following strategy and experience

Post by willthrill81 » Sun Feb 17, 2019 12:39 pm

tadamsmar wrote:
Sun Feb 17, 2019 12:34 pm
willthrill81 wrote:
Thu Jan 17, 2019 7:16 pm
The primary reason I'm posting all of this is for the sake of those who have asked me to post when I moved out of stocks, as well as to serve as record of the experiment I'm doing. I know that my portfolio is a sort of guinea pig, and I know that the long-term results of my strategy may be poor. But I believe very firmly that this is a strategy that I can stick with, and even if my returns lag those of the market for a long time, I'm willing to do so because I believe that I am likely to have some kind of downside protection while hopefully not at the expense of sacrificing upside potential. I might not achieve this goal, but that's alright. We save approximately 50% of our gross income, and I frankly don't need great returns to become financially independent at a very respectable age. A 4% average real return should result in us being comfortably financially independent by the time I'm 55, and if that must be pushed back, that's fine too.
I have been thinking about whether this is an appropriate experiment. One does not need to actually invest to test an investment method. You can just keep records. The outcome of a mere experiment would have no impact on when and if your family becomes financially independent.

But perhaps this experiment is more like one of those experiments where researchers self-ingest a compound in order to determine its effect on the human mind. Any other experiment would not provide the data and a researcher cannot ethically administer a novel compound to another human. The Swiss scientist Albert Hoffman famously performed these types of experiments.

I guess end-point is primarily about whether you can stick with it, so you do have to experiment on yourself.

Some new Bogleheads (me, for instance) end up doing something like this. They set an asset allocation and find that they can't sleep, so they adjust the stocks down a bit. They learn how they react to market fluctuations. Hopefully, beforehand they did some research on the kind of portfolio fluctuations they should expect. I think the key is to understand that market fluctuation don't have a big impact on the projected success of a well-designed plan.

One advantage of the Boglehead approach is that it's just a range finding experiment. You just adjust your allocation, you don't have to give up being a Boglehead. But if one's experiment with trend-following is failing the test of one's own psychology is there a parameter you can tweak?
There are some parameters that could certainly be adjusted. For instance, a shorter timing period than 7 months could be used, which would result in more frequent trades but presumably react to trend changes more frequently.

A strategy practiced by some like Paul Merriman is to only implement trend following with a portion of one's portfolio, in his case, 50%. He uses a Boglehead style approach with the other 50%. I think that this is a good middle ground, and it's not unforeseeable that I might want to switch to something like this down the road.
“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 » Sun Feb 17, 2019 2:09 pm

willthrill81 wrote:
Sun Feb 17, 2019 12:39 pm
...
There are some parameters that could certainly be adjusted. For instance, a shorter timing period than 7 months could be used, which would result in more frequent trades but presumably react to trend changes more frequently.
....
What have the backtested results shown in terms of good trades vs. bad trades (whipsaws) and over what period (hopefully 50 years or more)? This would help to set expectations for future results. Then if expectations were not being met, maybe one adjusts the strategy?

Some specs I have looked at when backtesting SMA methods are number of whipsaws worse then -5%, -10%, -15%, etc. Also max drawdown for the SMA parameters chosen versus buy-hold.

BTW, another parameter I've adjusted is the spread between the sell and buy points i.e. sell when price declines X% below the SMA and buy back when SMA moves up Y% above the SMA. This also trades off whipsaws for CAGR. In the past studies I've found X=-3% and Y=+1% to be pretty good values for my purposes. But these are only studies and I don't use this methodology myself.
Last edited by BlueEars on Sun Feb 17, 2019 4:22 pm, edited 1 time in total.

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Re: My trend following strategy and experience

Post by tadamsmar » Sun Feb 17, 2019 2:39 pm

willthrill81 wrote:
Sun Feb 17, 2019 12:39 pm
tadamsmar wrote:
Sun Feb 17, 2019 12:34 pm
One advantage of the Boglehead approach is that it's just a range finding experiment. You just adjust your allocation, you don't have to give up being a Boglehead. But if one's experiment with trend-following is failing the test of one's own psychology is there a parameter you can tweak?
There are some parameters that could certainly be adjusted. For instance, a shorter timing period than 7 months could be used, which would result in more frequent trades but presumably react to trend changes more frequently.

A strategy practiced by some like Paul Merriman is to only implement trend following with a portion of one's portfolio, in his case, 50%. He uses a Boglehead style approach with the other 50%. I think that this is a good middle ground, and it's not unforeseeable that I might want to switch to something like this down the road.
Here's Swedroe seeming to advocate a moderate allocation to a trend-following fund (he seems to think the high ER is justified):

https://www.etf.com/sections/index-inve ... nopaging=1

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Re: My trend following strategy and experience

Post by tadamsmar » Sun Feb 17, 2019 2:59 pm

willthrill81 wrote:
Thu Jan 17, 2019 7:16 pm
We save approximately 50% of our gross income, and I frankly don't need great returns to become financially independent at a very respectable age. A 4% average real return should result in us being comfortably financially independent by the time I'm 55, and if that must be pushed back, that's fine too.
Not sure what you mean by a great return. 4% real corresponds to 50/50 stocks bonds and that means enduring a good many -10% years and maybe a -20% year or two. And that's assuming historical rates. I think of 4% as a realistic estimated average return. But a robust plan must survive a rate lower than 4%. One has to save enough to have a robust plan.

100/0 only gives you 6% real on average (using history) and a robust plan has to work for less than that.

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Re: My trend following strategy and experience

Post by tadamsmar » Sun Feb 17, 2019 3:51 pm

willthrill81 wrote:
Thu Jan 17, 2019 7:16 pm
There are several reasons why I opted to switch to trend following. The biggest has to do with regret minimization, something that I have become far more attracted to over time than return optimization.
"Regret minimization" is an ambiguous term. The regret of what?

One could say that Bogleheads are primarily driven by regret minimization concerning the regret that they would feel if their plan failed such that they were significantly pinched for money after retirement. So they create a robust plan to minimize that possibility. By robust, I mean a plan that decouples plan failure from stock market fluctuations to a high degree. This does not require return optimization, because one can create a robust plan that assumes a low real return rate because saving is a factor. They do seek to optimize risk-adjusted return regardless of return.

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Re: My trend following strategy and experience

Post by willthrill81 » Sun Feb 17, 2019 4:38 pm

tadamsmar wrote:
Sun Feb 17, 2019 3:51 pm
willthrill81 wrote:
Thu Jan 17, 2019 7:16 pm
There are several reasons why I opted to switch to trend following. The biggest has to do with regret minimization, something that I have become far more attracted to over time than return optimization.
"Regret minimization" is an ambiguous term. The regret of what?
Regret regarding my AA, my factor allocation, and my U.S./international allocation.
“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 » Sun Feb 17, 2019 4:39 pm

tadamsmar wrote:
Sun Feb 17, 2019 2:59 pm
willthrill81 wrote:
Thu Jan 17, 2019 7:16 pm
We save approximately 50% of our gross income, and I frankly don't need great returns to become financially independent at a very respectable age. A 4% average real return should result in us being comfortably financially independent by the time I'm 55, and if that must be pushed back, that's fine too.
Not sure what you mean by a great return. 4% real corresponds to 50/50 stocks bonds and that means enduring a good many -10% years and maybe a -20% year or two. And that's assuming historical rates. I think of 4% as a realistic estimated average return. But a robust plan must survive a rate lower than 4%. One has to save enough to have a robust plan.
As I said, if I don't get the returns needed to enable me to become financially independent by age 55, that's okay.
tadamsmar wrote:
Sun Feb 17, 2019 2:59 pm
100/0 only gives you 6% real on average (using history) and a robust plan has to work for less than that.
100/0 in the U.S. is closer to 7% real historically.
“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 » Sun Feb 17, 2019 9:10 pm

willthrill81 wrote:
Sun Feb 17, 2019 4:38 pm
tadamsmar wrote:
Sun Feb 17, 2019 3:51 pm
willthrill81 wrote:
Thu Jan 17, 2019 7:16 pm
There are several reasons why I opted to switch to trend following. The biggest has to do with regret minimization, something that I have become far more attracted to over time than return optimization.
"Regret minimization" is an ambiguous term. The regret of what?
Regret regarding my AA, my factor allocation, and my U.S./international allocation.
Still ambiguous. What would you regret about any of those?

When I first took control of my AA I was stressed about how a drop in the market would impact my AA so I reduced my stock allocation. But now, I am satisfied with the robustness of my plan to fund my retirement. I will likely get a 4% real return, but I don't need a 4% real return for success.

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Re: My trend following strategy and experience

Post by willthrill81 » Sun Feb 17, 2019 9:12 pm

tadamsmar wrote:
Sun Feb 17, 2019 9:10 pm
willthrill81 wrote:
Sun Feb 17, 2019 4:38 pm
tadamsmar wrote:
Sun Feb 17, 2019 3:51 pm
willthrill81 wrote:
Thu Jan 17, 2019 7:16 pm
There are several reasons why I opted to switch to trend following. The biggest has to do with regret minimization, something that I have become far more attracted to over time than return optimization.
"Regret minimization" is an ambiguous term. The regret of what?
Regret regarding my AA, my factor allocation, and my U.S./international allocation.
Still ambiguous. What would you regret about any of those?

When I first took control of my AA I was stressed about how a drop in the market would impact my AA so I reduced my stock allocation. But now, I am satisfied with the robustness of my plan to fund my retirement. I will likely get a 4% real return, but I don't need a 4% real return for success.
I can easily envision myself wanting a higher stock allocation when stocks are performing well and vice versa. Same goes for a value vs. growth split and U.S./international.
“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 JustinR » Sun Feb 17, 2019 9:58 pm

When are portfolio balance updates posted?

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Re: My trend following strategy and experience

Post by willthrill81 » Sun Feb 17, 2019 10:16 pm

JustinR wrote:
Sun Feb 17, 2019 9:58 pm
When are portfolio balance updates posted?
I'm not listing portfolio balances. I will post my returns at the end of each year; my returns from last year are in the OP.

Also, I'll post every time I trade.
“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 LadyGeek » Sun Feb 17, 2019 10:59 pm

I removed an off-topic comment which may have intended to be humorous (but it did not come across that way). As a reminder, see:
At all times we must conduct ourselves in a respectful manner to other posters.
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Re: My trend following strategy and experience

Post by Islander » Mon Feb 18, 2019 11:06 am

Recently came across an article that I'm unable to reference that discussed SMA look-back periods for U.S.equities. Backtesting indicated that 12 mos. was optimal up to 2009 and thereafter 7 mos. was best.

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Re: My trend following strategy and experience

Post by tadamsmar » Mon Feb 18, 2019 1:17 pm

willthrill81 wrote:
Sun Feb 17, 2019 9:12 pm
tadamsmar wrote:
Sun Feb 17, 2019 9:10 pm
willthrill81 wrote:
Sun Feb 17, 2019 4:38 pm
tadamsmar wrote:
Sun Feb 17, 2019 3:51 pm
willthrill81 wrote:
Thu Jan 17, 2019 7:16 pm
There are several reasons why I opted to switch to trend following. The biggest has to do with regret minimization, something that I have become far more attracted to over time than return optimization.
"Regret minimization" is an ambiguous term. The regret of what?
Regret regarding my AA, my factor allocation, and my U.S./international allocation.
Still ambiguous. What would you regret about any of those?

When I first took control of my AA I was stressed about how a drop in the market would impact my AA so I reduced my stock allocation. But now, I am satisfied with the robustness of my plan to fund my retirement. I will likely get a 4% real return, but I don't need a 4% real return for success.
I can easily envision myself wanting a higher stock allocation when stocks are performing well and vice versa. Same goes for a value vs. growth split and U.S./international.
Sounds like you envision yourself regretting lack if short-term return optimization, or, at least, not getting better returns in the short run.

But in the OP you said: "The biggest [reason] has to do with regret minimization, something that I have become far more attracted to over time than return optimization."

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Re: My trend following strategy and experience

Post by HomerJ » Mon Feb 18, 2019 1:42 pm

Always passive wrote:
Fri Feb 15, 2019 12:57 am
I am very interesting in your strategy because as a retired investor I am always fearful of major market falls. I just do not have 5 or more years to get back to where I was just before the fall. The part what you have added which is a bit riskier is using relative strength to pick only ones ETF to hold each month. Have you compared the results of your strategy to dual momentum for your first full year (2018)?
Lastly, I think that this strategy will be much less efficient if you apply it in a taxable account (Do you agree?). And following the Bogleheads passive strategy I have all my equity in taxable with my fixed income in IRAs.
Good luck on your experiment.
A retired person should probably NOT be following this method of going 100% stocks to 100% bonds and back to 100% stocks.

If you're worried about stock crashes and portfolio losses, you should have a large chunk of your money in bonds all the time.

If you want to play around with this method, It should be moving from like 50/50 stocks/bonds to 30/70 and back again.
The J stands for Jay

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Re: My trend following strategy and experience

Post by HomerJ » Mon Feb 18, 2019 1:44 pm

I'm seeing a lot of new posters in this thread and Hedgefundie's thread.

Although these are interesting discussions for the veterans on Bogleheads, I do feel these threads are somewhat dangerous for new visitors.

We need more disclaimers that one should really know what they are doing to move beyond a basic two-fund or three-fund "buy and hold" strategy.
The J stands for Jay

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Re: My trend following strategy and experience

Post by HEDGEFUNDIE » Mon Feb 18, 2019 2:24 pm

HomerJ wrote:
Mon Feb 18, 2019 1:44 pm
I'm seeing a lot of new posters in this thread and Hedgefundie's thread.

Although these are interesting discussions for the veterans on Bogleheads, I do feel these threads are somewhat dangerous for new visitors.

We need more disclaimers that one should really know what they are doing to move beyond a basic two-fund or three-fund "buy and hold" strategy.
It’s ironic, were it not for my two years of reading Bogleheads I would never have learned enough about the markets to come up with my leveraged strategy.

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Re: My trend following strategy and experience

Post by Always passive » Mon Feb 18, 2019 4:23 pm

HomerJ wrote:
Mon Feb 18, 2019 1:42 pm
Always passive wrote:
Fri Feb 15, 2019 12:57 am
I am very interesting in your strategy because as a retired investor I am always fearful of major market falls. I just do not have 5 or more years to get back to where I was just before the fall. The part what you have added which is a bit riskier is using relative strength to pick only ones ETF to hold each month. Have you compared the results of your strategy to dual momentum for your first full year (2018)?
Lastly, I think that this strategy will be much less efficient if you apply it in a taxable account (Do you agree?). And following the Bogleheads passive strategy I have all my equity in taxable with my fixed income in IRAs.
Good luck on your experiment.
A retired person should probably NOT be following this method of going 100% stocks to 100% bonds and back to 100% stocks.

If you're worried about stock crashes and portfolio losses, you should have a large chunk of your money in bonds all the time.

If you want to play around with this method, It should be moving from like 50/50 stocks/bonds to 30/70 and back again.
I agree. My interest (although at this point only academic) is in the getting out of the market strategy. I did enjoy reading the author’s references on the subject.

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Re: My trend following strategy and experience

Post by zaboomafoozarg » Mon Feb 18, 2019 4:53 pm

HomerJ wrote:
Mon Feb 18, 2019 1:44 pm
I'm seeing a lot of new posters in this thread and Hedgefundie's thread.

Although these are interesting discussions for the veterans on Bogleheads, I do feel these threads are somewhat dangerous for new visitors.

We need more disclaimers that one should really know what they are doing to move beyond a basic two-fund or three-fund "buy and hold" strategy.
This is why I've long thought there should be a separate subforum here for anything more complicated or esoteric than slice and dice.

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Re: My trend following strategy and experience

Post by willthrill81 » Mon Feb 18, 2019 10:08 pm

HomerJ wrote:
Mon Feb 18, 2019 1:44 pm
We need more disclaimers that one should really know what they are doing to move beyond a basic two-fund or three-fund "buy and hold" strategy.
I tried to put such disclaimers in the OP. You certainly won't find me recommending my strategy or any other timing strategy to anyone.
“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 » Mon Feb 18, 2019 11:45 pm

willthrill81 wrote:
Mon Feb 18, 2019 10:08 pm
HomerJ wrote:
Mon Feb 18, 2019 1:44 pm
We need more disclaimers that one should really know what they are doing to move beyond a basic two-fund or three-fund "buy and hold" strategy.
I tried to put such disclaimers in the OP. You certainly won't find me recommending my strategy or any other timing strategy to anyone.
I think that you are unestimating the forum participants. We should be exposed to everything with absolutely no fear. This is not a babysitting club!
Anyone that adopts a strategy, whether it is active, like the one we are discussing here, or the passive ones that are most popular in the forum, should do the homework before investing. Mistakes will be made in one’s investing life whatever using something presented here or in the many other available investing sources. I assume that there is a significant number of investors that uses dual momentum to invest, they will make and lose money not unlike the ones adopting the simple 3 fund strategy. Bogleheads certainly do not own the investing magic key, simply because there is no one. That is what makes this subject so interesting.

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Re: My trend following strategy and experience

Post by marcopolo » Mon Feb 18, 2019 11:59 pm

HomerJ wrote:
Mon Feb 18, 2019 1:44 pm
I'm seeing a lot of new posters in this thread and Hedgefundie's thread.

Although these are interesting discussions for the veterans on Bogleheads, I do feel these threads are somewhat dangerous for new visitors.

We need more disclaimers that one should really know what they are doing to move beyond a basic two-fund or three-fund "buy and hold" strategy.
Oops, I thought the basic two- or three-fund buy and hold strategy was what you did after you figured out what you were doing. :oops:

I know it took me a while to get here, having tried a bunch of active funds years ago, run by, I am sure very smart people that presumably really knew what they were doing.

Now you are telling me once i get even smarter, i will move "beyond" this simple approach and go full circle back to some active strategy? How will I know when i am smarter than all those other really smart people running all those active funds with really smart strategies?
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: My trend following strategy and experience

Post by tadamsmar » Wed Feb 20, 2019 9:44 am

willthrill81 wrote:
Mon Feb 18, 2019 10:08 pm
HomerJ wrote:
Mon Feb 18, 2019 1:44 pm
We need more disclaimers that one should really know what they are doing to move beyond a basic two-fund or three-fund "buy and hold" strategy.
I tried to put such disclaimers in the OP. You certainly won't find me recommending my strategy or any other timing strategy to anyone.
In the OP, you say that Buy and Hold has a big problem that can only be addressed by lowering one's returns. You say the "trend following works" but you never say "buy and hold works". You say that "trend following" has "better absolute returns" and "lower drawdowns". You do advise viewing them with "many grains of salt" because it is not difficult to create a strategy that performs well in a backtest.

I think you oversell it in the OP. It seems to me that the proposed trend following strategy works in a backtest it was designed for, using a method that is 100% sure to produce many strategies that work in a backtest by using the backtest to tune the method. You never mention that buy and hold tests out as a reliable way to fund one's retirement in spite of the tradeoff between returns and drawdowns. You never mention the fact the evidence indicates we don't need better returns or lower drawdowns.

Edit: You do provide a link that provides out of sample backtests. But assuming it works for a lifetime has to be based on some theory of persistence. The effect could go away if too many investors exploit it. The "buy the market" effect of getting average returns cannot go away due to excessive exploitation. Excessive exploitation is easier to detect since there is data on the amount of passive trading. The problem effect would be loss of market efficiency. If one is going to commit to a strategy for 60+ years, then a strategy that does not depend on a difficult-to-test theory of persistence is a better choice. Buy-and-hold works and it has fewer moving parts. The key issue is that the wheel works, you don't need to invent it.
Last edited by tadamsmar on Wed Feb 20, 2019 3:37 pm, edited 9 times in total.

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Re: My trend following strategy and experience

Post by BlueEars » Wed Feb 20, 2019 10:23 am

There are thousands of posts on buy/hold here. Read the thread title and please let’s get off attacks.

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Re: My trend following strategy and experience

Post by Always passive » Wed Feb 20, 2019 10:41 am

Here is my view: if you are a young investor with 20-30 years ahead of you, B&H is the right strategy. If you are of old age, a trend following strategy maybe a good compromise between return and risk. Read the reference that the OP gives in his original text, it is highly convincing.
I know that Bogleheads attack the problem by allocating bonds as required, but a properly applied trend following on the stock portion may be as effective and is not as unconventional. It is based on momentum, which is a well stablished equity factor studied at universities all over and with a very long history.

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Re: My trend following strategy and experience

Post by tadamsmar » Wed Feb 20, 2019 11:46 am

Always passive wrote:
Wed Feb 20, 2019 10:41 am
Here is my view: if you are a young investor with 20-30 years ahead of you, B&H is the right strategy. If you are of old age, a trend following strategy maybe a good compromise between return and risk. Read the reference that the OP gives in his original text, it is highly convincing.
It's true that the reference does present out of sample backtesting.

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Re: My trend following strategy and experience

Post by Carol88888 » Thu Feb 21, 2019 8:12 pm

Do you have a rules-based methodology for when to get back in?

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Re: My trend following strategy and experience

Post by willthrill81 » Thu Feb 21, 2019 8:22 pm

Carol88888 wrote:
Thu Feb 21, 2019 8:12 pm
Do you have a rules-based methodology for when to get back in?
Yes, it's noted in the OP. When either the UER drops below its 12 month moving average OR one of my available stock funds rises above its 7 month moving average, I move back into stocks.
“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 Chan_va » Thu Feb 21, 2019 10:15 pm

Thanks OP. Will be following with interest. Since at the end of the day, portfolios are only a means to an end, a suggestion. Could you update the OP with your YTD ( and eventually 1,5 yr) returns and volatility of your portfolio and a benchmark? That way we can keep score with you ( and hopefully cheer you on ).

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