My trend following strategy and experience

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Islander
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Re: My trend following strategy and experience

Post by Islander » Fri Jan 18, 2019 12:56 pm

In the Philosophical Economist, William Dudley of the New York Fed is quoted as
saying:" Looking at the post-war period, every increase in the unemployment rate
of more than 0.3%-0.4% has resulted in a full-blown recession."

Does this not suggest that only increases in the UER above 0.3% should serve as a
signal?
Last edited by Islander on Fri Jan 18, 2019 1:00 pm, edited 1 time in total.

aristotelian
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Re: My trend following strategy and experience

Post by aristotelian » Fri Jan 18, 2019 12:59 pm

I don't get the logic of trend following. If you were to time the market, wouldn't you want to get out at the peak, when the market is still trending up, instead of when the market has already started going down? Personally, if I were to time the market, I would be more inclined to look at valuation rather than trend, and try to sell before the drop rather than in the middle of it.

That said, I appreciate your transparency and look forward to your updates.

Did you get out of stocks on Jan 1?

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sergeant
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Re: My trend following strategy and experience

Post by sergeant » Fri Jan 18, 2019 1:09 pm

I look forward to updates. The biggest hurdle for me would be being completely out of the market as it climbs, like the past couple days. Much easier for me to be in with at least part of my portfolio. Good luck.
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One Ping
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Re: My trend following strategy and experience

Post by One Ping » Fri Jan 18, 2019 1:48 pm

aristotelian wrote:
Fri Jan 18, 2019 12:59 pm
I don't get the logic of trend following. If you were to time the market, wouldn't you want to get out at the peak, when the market is still trending up, instead of when the market has already started going down?
willthrill81 wrote:
Thu Jan 17, 2019 8:55 pm
... Both Paul Merriman and Meb Faber use a trend following system ...
I have talked extensively with Paul Merriman and his goal with timing is not to capture the peak, but to avoid the trough. This dovetails nicely with willthrill81's goal of regret minimization. It's different than trying maximize gain.
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Riley15
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Re: My trend following strategy and experience

Post by Riley15 » Fri Jan 18, 2019 1:56 pm

willthrill81 wrote:
Thu Jan 17, 2019 7:16 pm

Last year, the first full year of my implementation of this strategy, my overall portfolio performance was -4.38%. This was slightly better than Vanguard's Total Stock Market index fund, VTSAX, which returned -5.17%, and much better than Vanguard's Total International Stock index fund, VTIAX, which returned -14.43%. But as Paul Merriman has said, "A year in the market is just noise," and I put very little weight on one year's performance in this context.

Thanks for sharing about your experience and how you're moving ahead with your strategy. Great to hear you're sticking to the plan. Even though it's market timing, it seems like it's actually a much more conservative approach to investing than buy and hold.

So did you maintain any asset allocation with fixed income when you're in stocks or not all all. So the -4.38% performance is from a 100% stock portfolio?
Last edited by Riley15 on Fri Jan 18, 2019 4:46 pm, edited 1 time in total.

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willthrill81
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Re: My trend following strategy and experience

Post by willthrill81 » Fri Jan 18, 2019 2:02 pm

Vulcan wrote:
Fri Jan 18, 2019 11:04 am
willthrill81 wrote:
Fri Jan 18, 2019 10:57 am
It wasn't an easy decision to cross over into trend following, but I'm well aware of the limitations of the data used to build the method I use. I'm very confident that I'll be able to stick with it.
Gee, this sounds an awful lot more complicated than not doing anything with VTWSX.

Is your spouse on board and sufficiently familiar with your strategy to be able to maintain it if you are dead or incapacitated?
My DW is not at all interested in such things. I've created a document which I've reviewed with her which contains detailed and specific instructions regarding what buy-and-hold investments to make in the event of my passing, withdrawal strategies, etc.
“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 » Fri Jan 18, 2019 2:03 pm

2pedals wrote:
Fri Jan 18, 2019 11:13 am
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.
I regret not using a buy and hold strategy market index fund in the 1980s when I first started investing. I also regret not buying Berkshire Hathaway in the 1980s. My regrets have nothing to do with optimization just poor cross road decisions that ended badly with poor returns. By starting this trend following approach you are making a cross road decision that can end with regret.
It may also end with contentment.
“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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willthrill81
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Re: My trend following strategy and experience

Post by willthrill81 » Fri Jan 18, 2019 2:04 pm

bgf wrote:
Fri Jan 18, 2019 11:34 am
willthrill81 wrote:
Thu Jan 17, 2019 7:35 pm
hdas wrote:
Thu Jan 17, 2019 7:24 pm
willthrill81 wrote:
Thu Jan 17, 2019 7:16 pm

This month is the first time that the first part of my system has called for me to move out of stocks. The UER is .01% higher than it's 12 month moving average (I'm sticking with my strategy to the letter), and all stock indexes I can invest in were below their 7 month moving average as of the beginning of this month. I've moved completely out of stocks and into a combination of short-term Treasuries, total bond market, and TIAA real estate (those who know much about this fund know why), depending on what I have access to in each account. I fully realize that I might get whipsawed in this move and know that I will at some point. That's a price that I'm willing to pay.

When my system calls for me to move back into stocks, I'll post that here.
In other words, you puked @ ~2475 (open) or 2531 (close) on January 4th. Good Luck with that decision. H :greedy
I'm not at all concerned with one month's results. Whipsaws are an inevitability of any trend following strategy, and deep drawdowns are an inevitability of buy-and-hold. Pick your poison.
just to confirm, you are getting whipsawed to the extreme right now, correct?
You can't confirm that a whipsaw occurred until you see the price that you buy back in at.
“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

bgf
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Re: My trend following strategy and experience

Post by bgf » Fri Jan 18, 2019 2:05 pm

willthrill81 wrote:
Fri Jan 18, 2019 2:04 pm
bgf wrote:
Fri Jan 18, 2019 11:34 am
willthrill81 wrote:
Thu Jan 17, 2019 7:35 pm
hdas wrote:
Thu Jan 17, 2019 7:24 pm
willthrill81 wrote:
Thu Jan 17, 2019 7:16 pm

This month is the first time that the first part of my system has called for me to move out of stocks. The UER is .01% higher than it's 12 month moving average (I'm sticking with my strategy to the letter), and all stock indexes I can invest in were below their 7 month moving average as of the beginning of this month. I've moved completely out of stocks and into a combination of short-term Treasuries, total bond market, and TIAA real estate (those who know much about this fund know why), depending on what I have access to in each account. I fully realize that I might get whipsawed in this move and know that I will at some point. That's a price that I'm willing to pay.

When my system calls for me to move back into stocks, I'll post that here.
In other words, you puked @ ~2475 (open) or 2531 (close) on January 4th. Good Luck with that decision. H :greedy
I'm not at all concerned with one month's results. Whipsaws are an inevitability of any trend following strategy, and deep drawdowns are an inevitability of buy-and-hold. Pick your poison.
just to confirm, you are getting whipsawed to the extreme right now, correct?
You can't confirm that a whipsaw occurred until you see the price that you buy back in at.
indeed, good point. so do you know what your entry point will be? or can that not be determined ahead of time?
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

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willthrill81
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Re: My trend following strategy and experience

Post by willthrill81 » Fri Jan 18, 2019 2:08 pm

sixtyforty wrote:
Fri Jan 18, 2019 12:42 pm
willthrill81 wrote:
Thu Jan 17, 2019 7:16 pm

...this system calls me to own stocks unless both (1) the U.S. unemployment rate (UER) is above its 12 month moving average and (2) all available stock indexes are below their 7 month moving average (the Philosophical Economist used the 10 month moving average, which is roughly analogous to the widely used 200 day moving average ...
Here is a scenerio... Let's assume the UER is above it's 12 SMA and the index is above it's 7 month SMA. You would continue holding the position until the index falls below it's 7 month SMA, causing you to exit. What happens if a month or two later that index closes above it's 7 month SMA, while the UER Is still above it's 12 SMA ? Do you re-establish the position ?
Unless both the UER is above its 12 MMA and all available stock indexes are below their 7 MMA, I remain in stocks. As soon as either of those conditions is no longer true, I move back into stocks.
“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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Vulcan
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Re: My trend following strategy and experience

Post by Vulcan » Fri Jan 18, 2019 2:08 pm

bgf wrote:
Fri Jan 18, 2019 2:05 pm
willthrill81 wrote:
Fri Jan 18, 2019 2:04 pm
bgf wrote:
Fri Jan 18, 2019 11:34 am
just to confirm, you are getting whipsawed to the extreme right now, correct?
You can't confirm that a whipsaw occurred until you see the price that you buy back in at.
indeed, good point. so do you know what your entry point will be? or can that not be determined ahead of time?
I think what he is saying is he is sitting on cash waiting for a crash:)
If you torture the data long enough, it will confess to anything. ~Ronald Coase

aristotelian
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Re: My trend following strategy and experience

Post by aristotelian » Fri Jan 18, 2019 2:10 pm

One Ping wrote:
Fri Jan 18, 2019 1:48 pm
aristotelian wrote:
Fri Jan 18, 2019 12:59 pm
I don't get the logic of trend following. If you were to time the market, wouldn't you want to get out at the peak, when the market is still trending up, instead of when the market has already started going down?
willthrill81 wrote:
Thu Jan 17, 2019 8:55 pm
... Both Paul Merriman and Meb Faber use a trend following system ...
I have talked extensively with Paul Merriman and his goal with timing is not to capture the peak, but to avoid the trough. This dovetails nicely with willthrill81's goal of regret minimization. It's different than trying maximize gain.
OK, I should not have referenced the peak. Of course, when the market is at peak is fundamentally unknowable. For me, exiting at high valuation wouldn't necessarily about maximizing gain. The idea would be to take profits and reduce risk after a period of gains. Exiting when the market is going up would also have the effect of avoiding troughs. Selling when the market is already headed down intuitively seems to defeat the purpose, especially if the initial drop happens suddenly.

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willthrill81
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Re: My trend following strategy and experience

Post by willthrill81 » Fri Jan 18, 2019 2:12 pm

aristotelian wrote:
Fri Jan 18, 2019 12:59 pm
I don't get the logic of trend following. If you were to time the market, wouldn't you want to get out at the peak, when the market is still trending up, instead of when the market has already started going down? Personally, if I were to time the market, I would be more inclined to look at valuation rather than trend, and try to sell before the drop rather than in the middle of it.
I know of no one with any measure of credibility who even claims to be able to call the top before there is any downward movement. Trend following has worked over the long-term by largely preventing the worst of the market falls. You partially 'pay' for this with whipsaws, where you sell at a lower price than you buy back in at but are 'vindicated' when the opposite happens in a substantial way. That's part of the reason why many don't stick with trend following: it may take years for the 'vindication' to occur.

Valuations have been shown to be terrible market timing signals because they are not reliably mean reverting.
aristotelian wrote:
Fri Jan 18, 2019 12:59 pm
Did 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.
“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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Vulcan
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Re: My trend following strategy and experience

Post by Vulcan » Fri Jan 18, 2019 2:13 pm

willthrill81 wrote:
Fri Jan 18, 2019 2:02 pm
Vulcan wrote:
Fri Jan 18, 2019 11:04 am
willthrill81 wrote:
Fri Jan 18, 2019 10:57 am
It wasn't an easy decision to cross over into trend following, but I'm well aware of the limitations of the data used to build the method I use. I'm very confident that I'll be able to stick with it.
Gee, this sounds an awful lot more complicated than not doing anything with VTWSX.

Is your spouse on board and sufficiently familiar with your strategy to be able to maintain it if you are dead or incapacitated?
My DW is not at all interested in such things. I've created a document which I've reviewed with her which contains detailed and specific instructions regarding what buy-and-hold investments to make in the event of my passing, withdrawal strategies, etc.
So buy-and-hold is good enough for your heirs?
If you torture the data long enough, it will confess to anything. ~Ronald Coase

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willthrill81
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Re: My trend following strategy and experience

Post by willthrill81 » Fri Jan 18, 2019 2:17 pm

Vulcan wrote:
Fri Jan 18, 2019 2:08 pm
bgf wrote:
Fri Jan 18, 2019 2:05 pm
willthrill81 wrote:
Fri Jan 18, 2019 2:04 pm
bgf wrote:
Fri Jan 18, 2019 11:34 am
just to confirm, you are getting whipsawed to the extreme right now, correct?
You can't confirm that a whipsaw occurred until you see the price that you buy back in at.
indeed, good point. so do you know what your entry point will be? or can that not be determined ahead of time?
I think what he is saying is he is sitting on cash waiting for a crash:)
Just to be very clear, I'm not predicting where the market is going next. What I'm doing is playing the historic odds. Historically, when the market was in its current position as defined by the two signals used in my approach, its performance was not good, certainly not good enough for me to want to remain in stocks. This is akin to rolling a die where you 'win' if any number higher than 2 is rolled but 'lose' if 1 or 2; you cannot predict which side of the die will come up, but over the long-term, the expected value is in your favor. That's the basic situation that I'm aiming to be in.
Last edited by willthrill81 on Fri Jan 18, 2019 2:20 pm, edited 1 time in total.
“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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willthrill81
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Re: My trend following strategy and experience

Post by willthrill81 » Fri Jan 18, 2019 2:18 pm

Vulcan wrote:
Fri Jan 18, 2019 2:13 pm
willthrill81 wrote:
Fri Jan 18, 2019 2:02 pm
Vulcan wrote:
Fri Jan 18, 2019 11:04 am
willthrill81 wrote:
Fri Jan 18, 2019 10:57 am
It wasn't an easy decision to cross over into trend following, but I'm well aware of the limitations of the data used to build the method I use. I'm very confident that I'll be able to stick with it.
Gee, this sounds an awful lot more complicated than not doing anything with VTWSX.

Is your spouse on board and sufficiently familiar with your strategy to be able to maintain it if you are dead or incapacitated?
My DW is not at all interested in such things. I've created a document which I've reviewed with her which contains detailed and specific instructions regarding what buy-and-hold investments to make in the event of my passing, withdrawal strategies, etc.
So buy-and-hold is good enough for your heirs?
I've never said that buy-and-hold wasn't good enough for anyone. I explicitly said so in the OP. But I do not believe it is best 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 willthrill81 » Fri Jan 18, 2019 2:19 pm

bgf wrote:
Fri Jan 18, 2019 2:05 pm
willthrill81 wrote:
Fri Jan 18, 2019 2:04 pm
bgf wrote:
Fri Jan 18, 2019 11:34 am
willthrill81 wrote:
Thu Jan 17, 2019 7:35 pm
hdas wrote:
Thu Jan 17, 2019 7:24 pm


In other words, you puked @ ~2475 (open) or 2531 (close) on January 4th. Good Luck with that decision. H :greedy
I'm not at all concerned with one month's results. Whipsaws are an inevitability of any trend following strategy, and deep drawdowns are an inevitability of buy-and-hold. Pick your poison.
just to confirm, you are getting whipsawed to the extreme right now, correct?
You can't confirm that a whipsaw occurred until you see the price that you buy back in at.
indeed, good point. so do you know what your entry point will be? or can that not be determined ahead of time?
I cannot know that in advance. When either of my two signals 'turns off', then I'll move back into stocks. Until then, I'm sitting out.

Whipsaws are an inevitable function of any trend following system. That's the price you pay to play. The price you pay for the simplicity of buy-and-hold is the occasional deep drawdown. Pick your poison.
“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 » Fri Jan 18, 2019 2:25 pm

sergeant wrote:
Fri Jan 18, 2019 1:09 pm
I look forward to updates. The biggest hurdle for me would be being completely out of the market as it climbs, like the past couple days. Much easier for me to be in with at least part of my portfolio. Good luck.
This is where knowledge of the market's history can help. Historically, the biggest 'up' days have occurred during bear markets. The problem is that they tend to be clustered with the biggest 'down' days, with the net result being very little growth. Avoiding both, if possible, would have historically led to better returns.

Also, this is the problem with the 'if you missed the best X days in the market, you're return would have been Y' argument. They neglect to say what your return would have been had you missed the worst X days in the market.

If we define an 'upward' or 'downward' trending market by the popular 200 day moving average approach, the market has historically returned around 2% when it was in a downward trend and volatility was much higher than when it was in an upward trend. I personally have no interest in holding stocks when the expected return is 2% and volatility is very high.
“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

boglewill34
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Re: My trend following strategy and experience

Post by boglewill34 » Fri Jan 18, 2019 2:30 pm

So to confirm, you rotate OUT of stocks when both signals turn 'on.' And then rotate back IN to stocks when ONE (or both) of the signals turn back off? And you check the signals once per month, or on some non-daily schedule?

I've been interested in what you were doing for as long as I first read your post about it, it wasn't as clear to me as to when you go back into equities as when you go out of them.

I enjoy your posts and thinking process, thanks!

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Vulcan
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Re: My trend following strategy and experience

Post by Vulcan » Fri Jan 18, 2019 2:43 pm

willthrill81 wrote:
Fri Jan 18, 2019 2:17 pm
Vulcan wrote:
Fri Jan 18, 2019 2:08 pm
bgf wrote:
Fri Jan 18, 2019 2:05 pm
willthrill81 wrote:
Fri Jan 18, 2019 2:04 pm
bgf wrote:
Fri Jan 18, 2019 11:34 am
just to confirm, you are getting whipsawed to the extreme right now, correct?
You can't confirm that a whipsaw occurred until you see the price that you buy back in at.
indeed, good point. so do you know what your entry point will be? or can that not be determined ahead of time?
I think what he is saying is he is sitting on cash waiting for a crash:)
Just to be very clear, I'm not predicting where the market is going next. What I'm doing is playing the historic odds. Historically, when the market was in its current position as defined by the two signals used in my approach, its performance was not good, certainly not good enough for me to want to remain in stocks. This is akin to rolling a die where you 'win' if any number higher than 2 is rolled but 'lose' if 1 or 2; you cannot predict which side of the die will come up, but over the long-term, the expected value is in your favor. That's the basic situation that I'm aiming to be in.
Except, of course, that the market has never been in its current position.

The problem with any and all backtesting strategies is best captured by my favorite quote from Niels Bohr, as recalled by another Nobel Prize winner, Soviet physicist Lev Landau (translation is mine):

Whenever there exists a limited number of experiments and an unlimited quantity of theories, there will exist an unlimited quantity of theories that satisfy the limited number of experiments

This is similar to what is known in mathematics as the Pigeonhole principle

https://en.wikipedia.org/wiki/Pigeonhole_principle

Edit: Also: see signature:)
Last edited by Vulcan on Fri Jan 18, 2019 2:48 pm, edited 1 time in total.
If you torture the data long enough, it will confess to anything. ~Ronald Coase

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2pedals
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Re: My trend following strategy and experience

Post by 2pedals » Fri Jan 18, 2019 2:45 pm

willthrill81 wrote:
Fri Jan 18, 2019 2:03 pm
2pedals wrote:
Fri Jan 18, 2019 11:13 am
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.
I regret not using a buy and hold strategy market index fund in the 1980s when I first started investing. I also regret not buying Berkshire Hathaway in the 1980s. My regrets have nothing to do with optimization just poor cross road decisions that ended badly with poor returns. By starting this trend following approach you are making a cross road decision that can end with regret.
It may also end with contentment.
How much regret would you have using a buy and hold BH strategy? I think anticipated regret is overestimated and should not change peoples actions and choices as much as they do. Intelligent people tend to over think these things.
Often regret is very false and displaced, and imagines the past to be totally other than it was -- John O'Donohue

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Vulcan
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Re: My trend following strategy and experience

Post by Vulcan » Fri Jan 18, 2019 2:47 pm

willthrill81 wrote:
Fri Jan 18, 2019 2:19 pm
Whipsaws are an inevitable function of any trend following system. That's the price you pay to play. The price you pay for the simplicity of buy-and-hold is the occasional deep drawdown. Pick your poison.
Can't you potentially experience an even deeper (and more permanent) drawdown with an unfortunate sequence of whipsaws?
If you torture the data long enough, it will confess to anything. ~Ronald Coase

cheezit
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Re: My trend following strategy and experience

Post by cheezit » Fri Jan 18, 2019 3:03 pm

willthrill81 wrote:
Fri Jan 18, 2019 2:08 pm
sixtyforty wrote:
Fri Jan 18, 2019 12:42 pm
willthrill81 wrote:
Thu Jan 17, 2019 7:16 pm

...this system calls me to own stocks unless both (1) the U.S. unemployment rate (UER) is above its 12 month moving average and (2) all available stock indexes are below their 7 month moving average (the Philosophical Economist used the 10 month moving average, which is roughly analogous to the widely used 200 day moving average ...
Here is a scenerio... Let's assume the UER is above it's 12 SMA and the index is above it's 7 month SMA. You would continue holding the position until the index falls below it's 7 month SMA, causing you to exit. What happens if a month or two later that index closes above it's 7 month SMA, while the UER Is still above it's 12 SMA ? Do you re-establish the position ?
Unless both the UER is above its 12 MMA and all available stock indexes are below their 7 MMA, I remain in stocks. As soon as either of those conditions is no longer true, I move back into stocks.
I wonder how a strategy with some hysteresis built in would do compared to the version you have implemented, eg.

Code: Select all

if (in_market && (unemployment > unemployment_sma_12) && (stock_index < stock_index_sma_7) ){
    get_out_of_market();
} else if (out_of_market && (unemployment < unemployment_sma_12) && (stock_index > stock_index_sma_7) ) {
    get_in_market();
}

While I have no interest in adopting trend-following myself, kudos for making a dedicated thread detailing what you're doing and what results you get, willthrill.

H-Town
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Re: My trend following strategy and experience

Post by H-Town » Fri Jan 18, 2019 3:16 pm

Hats off to your guts to use the entire retirement savings for trend following strategy. But I believe that it could work out very well in your case.

Good factors:
- You have high saving rate (50% of your gross).
- You are not exposed to big draw-down (similar to 2000's and 2008's) so if your retirement coincides with market downturn, you should be comfortable with 0% stock.
- You are not going after highest possible return. In fact, you accept whatever return that this model gives you.
- You lay out the plan and stick to it to the letter.

Bad factors:
- Complexity may lead to operator error.
- Emotions such as Fear of Missing Out and Fear of Losing Money might affect the plan. Not saying that you will. Maybe other people who want to implement this plan.
- Having a 60/40 allocation would achieve the same objectives that you set out.

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Vulcan
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Re: My trend following strategy and experience

Post by Vulcan » Fri Jan 18, 2019 3:18 pm

cheezit wrote:
Fri Jan 18, 2019 3:03 pm
willthrill81 wrote:
Fri Jan 18, 2019 2:08 pm
sixtyforty wrote:
Fri Jan 18, 2019 12:42 pm
willthrill81 wrote:
Thu Jan 17, 2019 7:16 pm

...this system calls me to own stocks unless both (1) the U.S. unemployment rate (UER) is above its 12 month moving average and (2) all available stock indexes are below their 7 month moving average (the Philosophical Economist used the 10 month moving average, which is roughly analogous to the widely used 200 day moving average ...
Here is a scenerio... Let's assume the UER is above it's 12 SMA and the index is above it's 7 month SMA. You would continue holding the position until the index falls below it's 7 month SMA, causing you to exit. What happens if a month or two later that index closes above it's 7 month SMA, while the UER Is still above it's 12 SMA ? Do you re-establish the position ?
Unless both the UER is above its 12 MMA and all available stock indexes are below their 7 MMA, I remain in stocks. As soon as either of those conditions is no longer true, I move back into stocks.
I wonder how a strategy with some hysteresis built in would do compared to the version you have implemented, eg.

Code: Select all

if (in_market && (unemployment > unemployment_sma_12) && (stock_index < stock_index_sma_7) ){
    get_out_of_market();
} else if (out_of_market && (unemployment < unemployment_sma_12) && (stock_index > stock_index_sma_7) ) {
    get_in_market();
}

While I have no interest in adopting trend-following myself, kudos for making a dedicated thread detailing what you're doing and what results you get, willthrill.
While puny humans are limiting themselves to such primitive heuristics, there are supercomputer clusters working overtime training their neural networks to look for exploitable signals in the market noise. How will their presence affect past data's already dubious usefulness? Stay tuned to find out!
If you torture the data long enough, it will confess to anything. ~Ronald Coase

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Re: My trend following strategy and experience

Post by sergeant » Fri Jan 18, 2019 3:29 pm

willthrill81 wrote:
Fri Jan 18, 2019 2:25 pm
sergeant wrote:
Fri Jan 18, 2019 1:09 pm
I look forward to updates. The biggest hurdle for me would be being completely out of the market as it climbs, like the past couple days. Much easier for me to be in with at least part of my portfolio. Good luck.
This is where knowledge of the market's history can help. Historically, the biggest 'up' days have occurred during bear markets. The problem is that they tend to be clustered with the biggest 'down' days, with the net result being very little growth. Avoiding both, if possible, would have historically led to better returns.

Also, this is the problem with the 'if you missed the best X days in the market, you're return would have been Y' argument. They neglect to say what your return would have been had you missed the worst X days in the market.

If we define an 'upward' or 'downward' trending market by the popular 200 day moving average approach, the market has historically returned around 2% when it was in a downward trend and volatility was much higher than when it was in an upward trend. I personally have no interest in holding stocks when the expected return is 2% and volatility is very high.
I understand what and why you are doing what you are doing. My comment was from a psychological perspective. I have an AA of 50/50 but can go down to 20/80 and up to 60/40. I'm not a strict BH disciple and base my AA on several things not nearly as disciplined as your system. If stocks are rising I feel good that I have exposure to equities. When they fall I feel good that my fixed income (mostly stable value at 4.21%) is plugging along. What time period is the 2% expected return during a downturn?
Lincoln 3 EOW! AA 40/60.

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Re: My trend following strategy and experience

Post by One Ping » Fri Jan 18, 2019 3:37 pm

willthrill81, a nuts & bolts question for you ...

My 401k has three stock indexes, S&P 500, International Stock, Russell 2000. My IRA's are in mutual funds at Vanguard. Filtering on stock index mutual funds (admiral) at Vanguard I see there are 24.

Seems like I would have two timing systems going, one for the 401k @ employer and one for the IRAs @ Vanguard. With the wide disparity in the number of stock indexes available it seem plausible (maybe even inevitable), that at some point one account would be in the market and the other out, right?

Given that there are 24 'available' admiral stock index mutual funds at Vanguard, it just seems unlikely to me (although, I admit haven't checked) that ALL of them would ever be below their 7 month moving average at the same time. Are you saying this was the situation earlier this month when you got out?
willthrill81 wrote:
Thu Jan 17, 2019 7:16 pm
For the first part of this strategy, whether to be in stocks or fixed income (i.e. 100% in or out; this isn't necessary, but I prefer it), I use a nearly identical version of that advocated by the Philosophical Economist and detailed here. (He also provides an excellent overview to why trend following works [https://www.philosophicaleconomics.com/ ... ngaverage/]here[/url].) To put it simply, this system calls me to own stocks unless both (1) the U.S. unemployment rate (UER) is above its 12 month moving average and (2) all available stock indexes are below their 7 month moving average ...

This month is the first time that the first part of my system has called for me to move out of stocks. The UER is .01% higher than it's 12 month moving average (I'm sticking with my strategy to the letter), and all stock indexes I can invest in were below their 7 month moving average as of the beginning of this month. I've moved completely out of stocks and into a combination of short-term Treasuries, total bond market, and TIAA real estate (those who know much about this fund know why), depending on what I have access to in each account.
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Re: My trend following strategy and experience

Post by willthrill81 » Fri Jan 18, 2019 4:11 pm

sergeant wrote:
Fri Jan 18, 2019 3:29 pm
What time period is the 2% expected return during a downturn?
Here's an table depicting this created back in 2014.

Image
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Re: My trend following strategy and experience

Post by willthrill81 » Fri Jan 18, 2019 4:17 pm

One Ping wrote:
Fri Jan 18, 2019 3:37 pm
willthrill81, a nuts & bolts question for you ...

My 401k has three stock indexes, S&P 500, International Stock, Russell 2000. My IRA's are in mutual funds at Vanguard. Filtering on stock index mutual funds (admiral) at Vanguard I see there are 24.

Seems like I would have two timing systems going, one for the 401k @ employer and one for the IRAs @ Vanguard. With the wide disparity in the number of stock indexes available it seem plausible (maybe even inevitable), that at some point one account would be in the market and the other out, right?

Given that there are 24 'available' admiral stock index mutual funds at Vanguard, it just seems unlikely to me (although, I admit haven't checked) that ALL of them would ever be below their 7 month moving average at the same time. Are you saying this was the situation earlier this month when you got out?
Yes, it is possible that you could be out of stocks in one account but still in in another. The first part of my strategy determine whether to be in stocks or bonds. It's possible that all of the available stock indexes in one account could be below their 7 month moving average, while one or more in another account could be above. That's why I created a 'timing model' in Portfolio Visualizer for each of my four accounts.

And yes, all of the available stock indexes in all of my accounts were below their 7 MMA as of the end of last month.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: My trend following strategy and experience

Post by willthrill81 » Fri Jan 18, 2019 4:20 pm

Vulcan wrote:
Fri Jan 18, 2019 2:47 pm
willthrill81 wrote:
Fri Jan 18, 2019 2:19 pm
Whipsaws are an inevitable function of any trend following system. That's the price you pay to play. The price you pay for the simplicity of buy-and-hold is the occasional deep drawdown. Pick your poison.
Can't you potentially experience an even deeper (and more permanent) drawdown with an unfortunate sequence of whipsaws?
It couldn't make the maximum drawdown worse than buy-and-hold. It's mathematically impossible to experience a deeper drawdown (assuming no leverage is involved) than the peak to trough with buy-and-hold. The risk is that it might extend the length of the drawdown by missing too much of the recovery, thereby also reducing returns.
“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 Vulcan » Fri Jan 18, 2019 4:24 pm

willthrill81 wrote:
Fri Jan 18, 2019 4:20 pm
Vulcan wrote:
Fri Jan 18, 2019 2:47 pm
willthrill81 wrote:
Fri Jan 18, 2019 2:19 pm
Whipsaws are an inevitable function of any trend following system. That's the price you pay to play. The price you pay for the simplicity of buy-and-hold is the occasional deep drawdown. Pick your poison.
Can't you potentially experience an even deeper (and more permanent) drawdown with an unfortunate sequence of whipsaws?
It couldn't make the maximum drawdown worse than buy-and-hold. It's mathematically impossible to experience a deeper drawdown (assuming no leverage is involved) than the peak to trough with buy-and-hold.
Could your model, conceivably, lead to you repeatedly buying high and selling low, and ultimately losing everything, even in a market that keeps going up long term?

Note: the question is not whether this would have happened in the past, but whether it could happen in the future, if the data happens to fool your model just right.
If you torture the data long enough, it will confess to anything. ~Ronald Coase

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Re: My trend following strategy and experience

Post by willthrill81 » Fri Jan 18, 2019 4:28 pm

Vulcan wrote:
Fri Jan 18, 2019 4:24 pm
willthrill81 wrote:
Fri Jan 18, 2019 4:20 pm
Vulcan wrote:
Fri Jan 18, 2019 2:47 pm
willthrill81 wrote:
Fri Jan 18, 2019 2:19 pm
Whipsaws are an inevitable function of any trend following system. That's the price you pay to play. The price you pay for the simplicity of buy-and-hold is the occasional deep drawdown. Pick your poison.
Can't you potentially experience an even deeper (and more permanent) drawdown with an unfortunate sequence of whipsaws?
It couldn't make the maximum drawdown worse than buy-and-hold. It's mathematically impossible to experience a deeper drawdown (assuming no leverage is involved) than the peak to trough with buy-and-hold.
Could your model, conceivably, lead to you repeatedly buying high and selling low, and ultimately losing everything, even in a market that keeps going up long term?
Losing "everything" by following this strategy would be mathematically impossible (i.e. even if you experienced a -5% return every year, you'd never go to $0). And it would be difficult to even conceive of how anything remotely like that could happen "in a market that keeps going up long term," much less for it to actually pan out.

You seem to think that buy-and-hold is somehow more secure than my strategy. Perhaps it is, but let's not forget about what happened to Japanese stock investors over the last 30 years.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: My trend following strategy and experience

Post by Vulcan » Fri Jan 18, 2019 4:33 pm

willthrill81 wrote:
Fri Jan 18, 2019 4:28 pm
Vulcan wrote:
Fri Jan 18, 2019 4:24 pm
willthrill81 wrote:
Fri Jan 18, 2019 4:20 pm
Vulcan wrote:
Fri Jan 18, 2019 2:47 pm
willthrill81 wrote:
Fri Jan 18, 2019 2:19 pm
Whipsaws are an inevitable function of any trend following system. That's the price you pay to play. The price you pay for the simplicity of buy-and-hold is the occasional deep drawdown. Pick your poison.
Can't you potentially experience an even deeper (and more permanent) drawdown with an unfortunate sequence of whipsaws?
It couldn't make the maximum drawdown worse than buy-and-hold. It's mathematically impossible to experience a deeper drawdown (assuming no leverage is involved) than the peak to trough with buy-and-hold.
Could your model, conceivably, lead to you repeatedly buying high and selling low, and ultimately losing everything, even in a market that keeps going up long term?
Losing "everything" by following this strategy would be mathematically impossible (i.e. even if you experienced a -5% return every year, you'd never go to $0). And it would be difficult to even conceive of how anything remotely like that could happen "in a market that keeps going up long term," much less for it to actually pan out.

You seem to think that buy-and-hold is somehow more secure than my strategy. Perhaps it is, but let's not forget about what happened to Japanese stock investors over the last 30 years.
Yes, yes, you will never lose everything. So long as we round up to the next penny, that is;)

How it could happen is very easy to visualize. Just draw 10 whipsaws in order.

Buy and hold is not safer, but it is guaranteed to work so long as the market that you hold continues to grow. (I happen to hold the World, so individual countries do not concern me)

Your strategy is not guaranteed to be profitable even in the profitable investment environment. Backtests are not proof.
If you torture the data long enough, it will confess to anything. ~Ronald Coase

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Re: My trend following strategy and experience

Post by JoMoney » Fri Jan 18, 2019 4:36 pm

mrussell22 wrote:
Fri Jan 18, 2019 12:49 pm
Interesting, keep us posted and Good Luck...
:thumbsup
Ditto...
Maybe try to keep it in this thread so we can follow along.
Thanks for sharing!
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Re: My trend following strategy and experience

Post by One Ping » Fri Jan 18, 2019 4:37 pm

willthrill81 wrote:
Fri Jan 18, 2019 4:17 pm
One Ping wrote:
Fri Jan 18, 2019 3:37 pm
willthrill81, a nuts & bolts question for you ...

My 401k has three stock indexes, S&P 500, International Stock, Russell 2000. My IRA's are in mutual funds at Vanguard. Filtering on stock index mutual funds (admiral) at Vanguard I see there are 24.

Seems like I would have two timing systems going, one for the 401k @ employer and one for the IRAs @ Vanguard. With the wide disparity in the number of stock indexes available it seem plausible (maybe even inevitable), that at some point one account would be in the market and the other out, right?

Given that there are 24 'available' admiral stock index mutual funds at Vanguard, it just seems unlikely to me (although, I admit haven't checked) that ALL of them would ever be below their 7 month moving average at the same time. Are you saying this was the situation earlier this month when you got out?
Yes, it is possible that you could be out of stocks in one account but still in in another. The first part of my strategy determine whether to be in stocks or bonds. It's possible that all of the available stock indexes in one account could be below their 7 month moving average, while one or more in another account could be above. That's why I created a 'timing model' in Portfolio Visualizer for each of my four accounts.

And yes, all of the available stock indexes in all of my accounts were below their 7 MMA as of the end of last month.
For the 7 month stock index moving average, since you only check the signals near the end of a month, do you use only the 7 most recent month ending values to calculate the stock index moving averages, or do you use the most recent ~150 daily index values?

ETA: So for accounts at Vanguard they would have to consider all 24 stock index funds in order to get a signal from the indexes?
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Re: My trend following strategy and experience

Post by Davinci » Fri Jan 18, 2019 4:43 pm

My trend following strategy and experience
Willthrill81,

I think you will make a lot of money and loose a lot of money. If you can keep your strategy through bull/bear, recessions/depressions and not flinch you will be ok and do better than most.

How do you determine in your strategy when is low and when is high and under what timeframe?

The problem is that most people underestimate their risk tolerance and they panic and sell to lock a loss during a recession/depression.

I commend you as it takes nerves of steel and lot of character to time the market. If I had pensions to rely on and play money I would consider this type of strategy and take more risk but cannot afford big losses.

The market correction in December was a good test of my risk tolerance and I found that I was more aggressive than I should in equities. I saw all the threads during the bull market to go 90-100% equities since it is easy to make that decision when things only go up. Reading the classic sheepdog thread was also very helpful to evaluate my risk tolerance.

Best of luck to you!

DaVinci
" Simplicity is the ultimate sophistication" Leonardo Da Vinci.

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Re: My trend following strategy and experience

Post by dcabler » Fri Jan 18, 2019 4:50 pm

cheezit wrote:
Fri Jan 18, 2019 3:03 pm
willthrill81 wrote:
Fri Jan 18, 2019 2:08 pm
sixtyforty wrote:
Fri Jan 18, 2019 12:42 pm
willthrill81 wrote:
Thu Jan 17, 2019 7:16 pm

...this system calls me to own stocks unless both (1) the U.S. unemployment rate (UER) is above its 12 month moving average and (2) all available stock indexes are below their 7 month moving average (the Philosophical Economist used the 10 month moving average, which is roughly analogous to the widely used 200 day moving average ...
Here is a scenerio... Let's assume the UER is above it's 12 SMA and the index is above it's 7 month SMA. You would continue holding the position until the index falls below it's 7 month SMA, causing you to exit. What happens if a month or two later that index closes above it's 7 month SMA, while the UER Is still above it's 12 SMA ? Do you re-establish the position ?
Unless both the UER is above its 12 MMA and all available stock indexes are below their 7 MMA, I remain in stocks. As soon as either of those conditions is no longer true, I move back into stocks.
I wonder how a strategy with some hysteresis built in would do compared to the version you have implemented, eg.

Code: Select all

if (in_market && (unemployment > unemployment_sma_12) && (stock_index < stock_index_sma_7) ){
    get_out_of_market();
} else if (out_of_market && (unemployment < unemployment_sma_12) && (stock_index > stock_index_sma_7) ) {
    get_in_market();
}

While I have no interest in adopting trend-following myself, kudos for making a dedicated thread detailing what you're doing and what results you get, willthrill.
I monitor such a system with hysteresis on top of the "hurricane" method that Jim Otar describes (2 moving average crossovers) You can pretty easily figure out, based on historic data, the amount of hysteresis that can be used to minimize or eliminate whipsaws. Problem is, the optimal amount of hysteresis is different for each index you may want to move in and out of. And it counts on the past looking like the future - for example, you might see pattern that a deep drawdown never happened unless the crossover is at least 4%. But there is nothing structural in the stock market to keep the crossover from going to 5% before turning back around the next month, thus producing a whipsaw. Plus if there actually is a deep downturn, you've lost 4% of that downturn. So, another tradeoff. After fine tuning the system I monitor, I decided that I had excessively curve fit. Still, it's fun to track, even if I don't take any action.


Thought about adding the 12Month SMA of the UER to what I monitor after reading the Philosophical Economics article a year or two ago, but haven't yet. Like other trend following schemes, in the past, it does seem to help limit the effects of deep drawdowns quite a bit, but doesn't do a tremendous amount for improving long term CAGR. Anyway, I still monitor it in my monthly spreadsheet update, but I still don't act on it.

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Re: My trend following strategy and experience

Post by sixtyforty » Fri Jan 18, 2019 6:07 pm

willthrill81 wrote:
Fri Jan 18, 2019 2:08 pm
sixtyforty wrote:
Fri Jan 18, 2019 12:42 pm
willthrill81 wrote:
Thu Jan 17, 2019 7:16 pm

...this system calls me to own stocks unless both (1) the U.S. unemployment rate (UER) is above its 12 month moving average and (2) all available stock indexes are below their 7 month moving average (the Philosophical Economist used the 10 month moving average, which is roughly analogous to the widely used 200 day moving average ...
Here is a scenerio... Let's assume the UER is above it's 12 SMA and the index is above it's 7 month SMA. You would continue holding the position until the index falls below it's 7 month SMA, causing you to exit. What happens if a month or two later that index closes above it's 7 month SMA, while the UER Is still above it's 12 SMA ? Do you re-establish the position ?
Unless both the UER is above its 12 MMA and all available stock indexes are below their 7 MMA, I remain in stocks. As soon as either of those conditions is no longer true, I move back into stocks.
I think the other way to say this, especially for people that are asking about whipsaws is; When the UER is below it's 12 MMA, the strategy instructs you NOT to follow the trend indicator (in your case the 7 MMA). So, when the UER is below it's MMA, there is no chance for whipsaws. When the UER is above it's 12 MMA ( possibly indicating a recession ahead), the strategy instructs you TO FOLLOW the Trend Indicator, in which case whipsaws could happen during this period. It's a basic trend following strategy with they added benefit to reduce whipsaws. One downside is because price is a leading indicator, it often moves ahead of anything else. So the indexes could start falling below their MMA way before the the UER crosses above. Because it's a monthly signal and stocks go down much faster than they go up, the indexes could be deep into a downturn before the crossover occurs, directing you to then follow the trend indicator. Anyway, interesting stuff.
"Simplicity is the ultimate sophistication" - Leonardo Da Vinci

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Re: My trend following strategy and experience

Post by willthrill81 » Fri Jan 18, 2019 6:09 pm

One Ping wrote:
Fri Jan 18, 2019 4:37 pm
willthrill81 wrote:
Fri Jan 18, 2019 4:17 pm
One Ping wrote:
Fri Jan 18, 2019 3:37 pm
willthrill81, a nuts & bolts question for you ...

My 401k has three stock indexes, S&P 500, International Stock, Russell 2000. My IRA's are in mutual funds at Vanguard. Filtering on stock index mutual funds (admiral) at Vanguard I see there are 24.

Seems like I would have two timing systems going, one for the 401k @ employer and one for the IRAs @ Vanguard. With the wide disparity in the number of stock indexes available it seem plausible (maybe even inevitable), that at some point one account would be in the market and the other out, right?

Given that there are 24 'available' admiral stock index mutual funds at Vanguard, it just seems unlikely to me (although, I admit haven't checked) that ALL of them would ever be below their 7 month moving average at the same time. Are you saying this was the situation earlier this month when you got out?
Yes, it is possible that you could be out of stocks in one account but still in in another. The first part of my strategy determine whether to be in stocks or bonds. It's possible that all of the available stock indexes in one account could be below their 7 month moving average, while one or more in another account could be above. That's why I created a 'timing model' in Portfolio Visualizer for each of my four accounts.

And yes, all of the available stock indexes in all of my accounts were below their 7 MMA as of the end of last month.
For the 7 month stock index moving average, since you only check the signals near the end of a month, do you use only the 7 most recent month ending values to calculate the stock index moving averages, or do you use the most recent ~150 daily index values?

ETA: So for accounts at Vanguard they would have to consider all 24 stock index funds in order to get a signal from the indexes?
I use Portfolio Visualizer to compute the moving averages. It uses the end-of-month values for all of the funds I include.

Yes, you would need to include all of the funds in the above analysis. You can put them into Portfolio Visualizer once, then save that model and rerun it in seconds.
“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 » Fri Jan 18, 2019 6:12 pm

Davinci wrote:
Fri Jan 18, 2019 4:43 pm
My trend following strategy and experience
Willthrill81,

I think you will make a lot of money and loose a lot of money. If you can keep your strategy through bull/bear, recessions/depressions and not flinch you will be ok and do better than most.

How do you determine in your strategy when is low and when is high and under what timeframe?

The problem is that most people underestimate their risk tolerance and they panic and sell to lock a loss during a recession/depression.

I commend you as it takes nerves of steel and lot of character to time the market. If I had pensions to rely on and play money I would consider this type of strategy and take more risk but cannot afford big losses.

The market correction in December was a good test of my risk tolerance and I found that I was more aggressive than I should in equities. I saw all the threads during the bull market to go 90-100% equities since it is easy to make that decision when things only go up. Reading the classic sheepdog thread was also very helpful to evaluate my risk tolerance.

Best of luck to you!

DaVinci
As noted above, I'll reference the performance of both VTSAX and a 85/15 mix of VTSAX and VBLTX as that's the historic proportion of this strategy being in and out of stocks. But to be honest, as long as my returns are adequate to meet my goals, I'll be satisfied. I'll simply make this comparison for the sake of others' reference.

Perhaps it will take more guts to stick with this strategy than buy-and-hold, but I'm not sure. It would have been gut wrenching to see my portfolio cut in half from 2007-2009. All roads carry risk, and none are easy to follow, even though some are simpler than others.
“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 » Fri Jan 18, 2019 6:20 pm

sixtyforty wrote:
Fri Jan 18, 2019 6:07 pm
willthrill81 wrote:
Fri Jan 18, 2019 2:08 pm
sixtyforty wrote:
Fri Jan 18, 2019 12:42 pm
willthrill81 wrote:
Thu Jan 17, 2019 7:16 pm

...this system calls me to own stocks unless both (1) the U.S. unemployment rate (UER) is above its 12 month moving average and (2) all available stock indexes are below their 7 month moving average (the Philosophical Economist used the 10 month moving average, which is roughly analogous to the widely used 200 day moving average ...
Here is a scenerio... Let's assume the UER is above it's 12 SMA and the index is above it's 7 month SMA. You would continue holding the position until the index falls below it's 7 month SMA, causing you to exit. What happens if a month or two later that index closes above it's 7 month SMA, while the UER Is still above it's 12 SMA ? Do you re-establish the position ?
Unless both the UER is above its 12 MMA and all available stock indexes are below their 7 MMA, I remain in stocks. As soon as either of those conditions is no longer true, I move back into stocks.
I think the other way to say this, especially for people that are asking about whipsaws is; When the UER is below it's 12 MMA, the strategy instructs you NOT to follow the trend indicator (in your case the 7 MMA). So, when the UER is below it's MMA, there is no chance for whipsaws. When the UER is above it's 12 MMA ( possibly indicating a recession ahead), the strategy instructs you TO FOLLOW the Trend Indicator, in which case whipsaws could happen during this period. It's a basic trend following strategy with they added benefit to reduce whipsaws. One downside is because price is a leading indicator, it often moves ahead of anything else. So the indexes could start falling below their MMA way before the the UER crosses above. Because it's a monthly signal and stocks go down much faster than they go up, the indexes could be deep into a downturn before the crossover occurs, directing you to then follow the trend indicator. Anyway, interesting stuff.
Very well said. Indeed, the purpose of adding the 12 MMA of the UER is to limit whipsaws. Many trend followers would probably view my strategy as being too biased toward holding stocks, but I'm very comfortable with it.

This month is the first time since 2009 that this strategy has called for moving out of stocks. If one was simply following the 7 MMA of VTSAX, it would have been sold a total of seven times through last month. Also, the annual return of such a strategy would have been 12.04% vs. 13.25% for buy-and-hold. And that's been a frequent occurrence with trend following strategies that only use price: they tend to lag the market during the bull runs, sometimes significantly, due to whipsaws. But if we extended this analysis with this simple strategy back to 2007 through today, it would have had an annual return of 9.76% vs. 7.22% for buy-and-hold and, more importantly to me, a 12.71% max drawdown instead of 50.84%.
Last edited by willthrill81 on Fri Jan 18, 2019 6:24 pm, edited 1 time in total.
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Re: My trend following strategy and experience

Post by willthrill81 » Fri Jan 18, 2019 6:23 pm

Islander wrote:
Fri Jan 18, 2019 12:56 pm
In the Philosophical Economist, William Dudley of the New York Fed is quoted as
saying:" Looking at the post-war period, every increase in the unemployment rate
of more than 0.3%-0.4% has resulted in a full-blown recession."

Does this not suggest that only increases in the UER above 0.3% should serve as a
signal?
What he said was true, but if you read the rest of that PE post, you'll see that the UER crossing above its 12 MMA occurred before every recession since 1948 and with only a few false-positives. The bigger point is that a rising UER has been a solid recession indicator. Whether it will be in the future, I don't know, but that's what I'm using.
“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 Davinci » Fri Jan 18, 2019 6:27 pm

As noted above, I'll reference the performance of both VTSAX and a 85/15 mix of VTSAX and VBLTX as that's the historic proportion of this strategy being in and out of stocks. But to be honest, as long as my returns are adequate to meet my goals, I'll be satisfied. I'll simply make this comparison for the sake of others' reference.

Perhaps it will take more guts to stick with this strategy than buy-and-hold, but I'm not sure. It would have been gut wrenching to see my portfolio cut in half from 2007-2009. All roads carry risk, and none are easy to follow, even though some are simpler than others.
Your strategy looks reasonable to me and if you went through 2007-2009 and did not get hurt you will stick to it. It will definitely do better than many of the non-boglehead portfolios up there.

I am very curious to see how it does compared to a lazy portfolio, please update us.

You are correct, higher risk usually means higher returns and there is always risk in investing but do not take more risk than you can bear.

Cheers,
" Simplicity is the ultimate sophistication" Leonardo Da Vinci.

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Re: My trend following strategy and experience

Post by willthrill81 » Fri Jan 18, 2019 6:28 pm

Vulcan wrote:
Fri Jan 18, 2019 4:33 pm
willthrill81 wrote:
Fri Jan 18, 2019 4:28 pm
Vulcan wrote:
Fri Jan 18, 2019 4:24 pm
willthrill81 wrote:
Fri Jan 18, 2019 4:20 pm
Vulcan wrote:
Fri Jan 18, 2019 2:47 pm

Can't you potentially experience an even deeper (and more permanent) drawdown with an unfortunate sequence of whipsaws?
It couldn't make the maximum drawdown worse than buy-and-hold. It's mathematically impossible to experience a deeper drawdown (assuming no leverage is involved) than the peak to trough with buy-and-hold.
Could your model, conceivably, lead to you repeatedly buying high and selling low, and ultimately losing everything, even in a market that keeps going up long term?
Losing "everything" by following this strategy would be mathematically impossible (i.e. even if you experienced a -5% return every year, you'd never go to $0). And it would be difficult to even conceive of how anything remotely like that could happen "in a market that keeps going up long term," much less for it to actually pan out.

You seem to think that buy-and-hold is somehow more secure than my strategy. Perhaps it is, but let's not forget about what happened to Japanese stock investors over the last 30 years.
Yes, yes, you will never lose everything. So long as we round up to the next penny, that is;)

How it could happen is very easy to visualize. Just draw 10 whipsaws in order.

Buy and hold is not safer, but it is guaranteed to work so long as the market that you hold continues to grow. (I happen to hold the World, so individual countries do not concern me)

Your strategy is not guaranteed to be profitable even in the profitable investment environment. Backtests are not proof.
I've never said that anything was guaranteed, nor have I said that backtests were proof of anything. And I believe that the tone I used in the OP reflects this as well. And my strategy is very long-biased for the very purpose of limiting whipsaws. The only time a whipsaw could even occur is if the UER is above its 12 MMA, because unless that's true, I don't move out of stocks at all.
“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 whodidntante » Fri Jan 18, 2019 6:30 pm

I'm rooting for you, although I probably should not. You can outperform by being out of the market during a period of bad performance for me. LOL.

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Re: My trend following strategy and experience

Post by willthrill81 » Fri Jan 18, 2019 6:32 pm

Riley15 wrote:
Fri Jan 18, 2019 1:56 pm
So did you maintain any asset allocation with fixed income when you're in stocks or not all all. So the -4.38% performance is from a 100% stock portfolio?
No, I held no fixed income at all last year. The -4.38% was from being 100% stock all year.

I didn't note it earlier, but the second part of my strategy (i.e. rotating into the stock index with the highest relative advantage over the prior 7 months) allows me to be completely ambivalent with regard to factors and the U.S./international question. When small-cap value is on a roll, I rotate into it. If it's international, so be it. This is a very freeing aspect and means that I don't have to try to determine whether I want to factor tilt and how much, or how much to allocate to 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 willthrill81 » Fri Jan 18, 2019 6:33 pm

whodidntante wrote:
Fri Jan 18, 2019 6:30 pm
I'm rooting for you, although I probably should not.
Thanks! :D
“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 Vulcan » Fri Jan 18, 2019 6:56 pm

willthrill81 wrote:
Fri Jan 18, 2019 6:28 pm
The only time a whipsaw could even occur is if the UER is above its 12 MMA, because unless that's true, I don't move out of stocks at all.
And that can't happen multiple times in a row because...
If you torture the data long enough, it will confess to anything. ~Ronald Coase

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Re: My trend following strategy and experience

Post by willthrill81 » Fri Jan 18, 2019 6:57 pm

Vulcan wrote:
Fri Jan 18, 2019 6:56 pm
willthrill81 wrote:
Fri Jan 18, 2019 6:28 pm
The only time a whipsaw could even occur is if the UER is above its 12 MMA, because unless that's true, I don't move out of stocks at all.
And that can't happen multiple times in a row because...
It could. And all of our stock holdings, both U.S. and international, could be confiscated and all bonds defaulted upon. If you're looking for absolute guarantees, investing isn't the place to search.
“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 FRT15 » Fri Jan 18, 2019 6:59 pm

If a change is required do you do it on the first trading day of the month? Also for the 7 months, do you include the month that just closed or is it the prior 7?

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