Imperfect market timing still works -- if you stick with it

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CULater
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Imperfect market timing still works -- if you stick with it

Post by CULater » Wed May 08, 2019 9:43 am

Article examines the outcome of rules-based market timing and finds that it produces higher returns than buy-and-hold even if you miss the mark getting in and out by as much as one year. This outcome results primarily from avoiding at least some of the losses from large market declines of 20% or greater. However, to do this requires the discipline to tolerate frequent false positives and stick with your method over the long haul.
Though I don’t believe that most individuals can time the market on a consistent basis, the data suggests that using a quantitative, rules-based approach to market timing can yield positive results.

Why do these kind of timing strategies work in the long run? Because they fail a lot. They have false positives and this makes them difficult for many investors to stick with.
https://ofdollarsanddata.com/when-does- ... ming-work/
Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof. ~ John Kenneth Galbraith

jdilla1107
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Re: Imperfect market timing still works -- if you stick with it

Post by jdilla1107 » Wed May 08, 2019 9:56 am

" the data suggests that using a quantitative, rules-based approach to market timing can yield positive results."

Of course it can. It can also yield negative results. :shock:

Lot's of people can be successful with market timing. The trick is picking who will be successful before hand. The classic example is 100,000 people all flipping quarters together. At the end of 10 flips, there are going to be plenty of people who flipped heads 10 times in a row. The problem is that the people who did this are not "better coin flippers", it's just luck and selection bias.
Last edited by jdilla1107 on Wed May 08, 2019 10:09 am, edited 1 time in total.

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CULater
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Re: Imperfect market timing still works -- if you stick with it

Post by CULater » Wed May 08, 2019 10:05 am

jdilla1107 wrote:
Wed May 08, 2019 9:56 am
" the data suggests that using a quantitative, rules-based approach to market timing can yield positive results."

Of course it can. It can also yield negative results. :shock:

Lot's of people can be successful with market timing. The trick is picking who will be successful before hand. The classic example is 100,000 people all flipping quarters together. At the end of 10 flips, there are going to be plenty of people who flipped heads 10 times in a row. The problem is that the people who did this are not "better coin flippers", it's just luck.
Buy and Hold can also yield negative results. It seems obvious to me that MA trend-following will allow you to mitigate some of the losses during large market drawdowns. If one believes there will be no large market drawdowns in the future, then it will fail.
Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof. ~ John Kenneth Galbraith

DrGoogle2017
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Re: Imperfect market timing still works -- if you stick with it

Post by DrGoogle2017 » Wed May 08, 2019 10:07 am

I’m not sure if this is correct, but Carter Worth said buy and hold from Jan 2018 till yesterday was about 3%. It’s like 3 year CD.

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Re: Imperfect market timing still works -- if you stick with it

Post by marcopolo » Wed May 08, 2019 10:15 am

CULater wrote:
Wed May 08, 2019 10:05 am
jdilla1107 wrote:
Wed May 08, 2019 9:56 am
" the data suggests that using a quantitative, rules-based approach to market timing can yield positive results."

Of course it can. It can also yield negative results. :shock:

Lot's of people can be successful with market timing. The trick is picking who will be successful before hand. The classic example is 100,000 people all flipping quarters together. At the end of 10 flips, there are going to be plenty of people who flipped heads 10 times in a row. The problem is that the people who did this are not "better coin flippers", it's just luck.
Buy and Hold can also yield negative results. It seems obvious to me that MA trend-following will allow you to mitigate some of the losses during large market drawdowns. If one believes there will be no large market drawdowns in the future, then it will fail.
Is it really obvious? What rules to guarantee that?
There is a thread where willthrill81 has bravely documented his trend following approach. Unfortunately, he did not avoid the oct-dec drawdown of 20%, and then the signal had him get out in January, just in time to miss a nice run up.

His approach may well pay off in the long run, but it is not at all "obvious" that such approaches will avoid significant amount of the drawdown, and then they will also likely miss some of the recovery. Whether, the net result is better/worse than simply holding through the cycles is even less obvious.
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: Imperfect market timing still works -- if you stick with it

Post by greg24 » Wed May 08, 2019 10:23 am

CULater wrote:
Wed May 08, 2019 9:43 am
Article examines the outcome of rules-based market timing and finds that it produces higher returns than buy-and-hold even if you miss the mark getting in and out by as much as one year.
This article does not show that rules-based market timing produces higher returns than buy-and-hold.

jdilla1107
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Re: Imperfect market timing still works -- if you stick with it

Post by jdilla1107 » Wed May 08, 2019 10:29 am

CULater wrote:
Wed May 08, 2019 10:05 am
Buy and Hold can also yield negative results. It seems obvious to me that MA trend-following will allow you to mitigate some of the losses during large market drawdowns. If one believes there will be no large market drawdowns in the future, then it will fail.
If there was an approach that could reduce draw downs while maintaining the upside, wouldn't everyone do that?

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Re: Imperfect market timing still works -- if you stick with it

Post by TheTimeLord » Wed May 08, 2019 10:33 am

DrGoogle2017 wrote:
Wed May 08, 2019 10:07 am
I’m not sure if this is correct, but Carter Worth said buy and hold from Jan 2018 till yesterday was about 3%. It’s like 3 year CD.
The market closed at 2,673.61 on the last trading day of 2017 and close yesterday at 2,884.05 so 2,884.05/2,673.61 = 1.0787 or a gain of 7.87%. I think I heard the same comment but I believe he said February 2018 instead of January. The market had a run up in January of 2018 and closed at 2,821.98 on Feb. 1, 2018.
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Re: Imperfect market timing still works -- if you stick with it

Post by Ged » Wed May 08, 2019 10:34 am

DrGoogle2017 wrote:
Wed May 08, 2019 10:07 am
I’m not sure if this is correct, but Carter Worth said buy and hold from Jan 2018 till yesterday was about 3%. It’s like 3 year CD.
Suppose I pick Jan 1 2012 to yesterday. I get 224%. Not including dividends.

DrGoogle2017
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Re: Imperfect market timing still works -- if you stick with it

Post by DrGoogle2017 » Wed May 08, 2019 10:48 am

Ged wrote:
Wed May 08, 2019 10:34 am
DrGoogle2017 wrote:
Wed May 08, 2019 10:07 am
I’m not sure if this is correct, but Carter Worth said buy and hold from Jan 2018 till yesterday was about 3%. It’s like 3 year CD.
Suppose I pick Jan 1 2012 to yesterday. I get 224%. Not including dividends.
Why not pick 2009, why 2012, your gain will be more impressive.

DrGoogle2017
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Re: Imperfect market timing still works -- if you stick with it

Post by DrGoogle2017 » Wed May 08, 2019 10:49 am

TheTimeLord wrote:
Wed May 08, 2019 10:33 am
DrGoogle2017 wrote:
Wed May 08, 2019 10:07 am
I’m not sure if this is correct, but Carter Worth said buy and hold from Jan 2018 till yesterday was about 3%. It’s like 3 year CD.
The market closed at 2,673.61 on the last trading day of 2017 and close yesterday at 2,884.05 so 2,884.05/2,673.61 = 1.0787 or a gain of 7.87%. I think I heard the same comment but I believe he said February 2018 instead of January. The market had a run up in January of 2018 and closed at 2,821.98 on Feb. 1, 2018.
Thanks for clarifying, I was half asleep when I listened to his comment, hence I was not sure.

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Re: Imperfect market timing still works -- if you stick with it

Post by Thesaints » Wed May 08, 2019 11:05 am

Not investing beats the market in every down year !!!

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CULater
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Re: Imperfect market timing still works -- if you stick with it

Post by CULater » Wed May 08, 2019 11:09 am

Trend following vs. Buy and Hold:
Flip it and make trend following the benchmark and consider buy and hold. Works sometimes, doesn't work other times, but you eat massive tail risk with buy and hold, therefore isn't worth the risk/effort.

]If trend following is your base allocation, would you as an investor allocate to a different strategy [60/40] that underperformed at a 70%+ rate over 3-5 year rolling time frames and 90-100% of rolling 10-15 year time frames, and had materially more downside risk? Not only would I not make that allocation, I'd love to bet someone with proceeds going to charity that trend following would outperform.
https://econompicdata.blogspot.com/2018 ... efits.html

I don't think the data are in doubt - just the willingness to stick with a trend following strategy through the periods when it isn't working. But you have to do the same when BAH isn't working, and it has produced inferior returns with greater risk.
Last edited by CULater on Wed May 08, 2019 11:14 am, edited 1 time in total.
Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof. ~ John Kenneth Galbraith

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greg24
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Re: Imperfect market timing still works -- if you stick with it

Post by greg24 » Wed May 08, 2019 11:13 am

CULater wrote:
Wed May 08, 2019 11:09 am
I don't think the data are in doubt
Your first link didn't even have data.

The second link claims it outperforms 60/40. How about 80/20?

If an individual is thinking about market timing, I doubt they will be as conservative as 60/40.

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Tycoon
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Re: Imperfect market timing still works -- if you stick with it

Post by Tycoon » Wed May 08, 2019 11:23 am

Too funny! Haha
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Re: Imperfect market timing still works -- if you stick with it

Post by willthrill81 » Wed May 08, 2019 11:38 am

marcopolo wrote:
Wed May 08, 2019 10:15 am
CULater wrote:
Wed May 08, 2019 10:05 am
jdilla1107 wrote:
Wed May 08, 2019 9:56 am
" the data suggests that using a quantitative, rules-based approach to market timing can yield positive results."

Of course it can. It can also yield negative results. :shock:

Lot's of people can be successful with market timing. The trick is picking who will be successful before hand. The classic example is 100,000 people all flipping quarters together. At the end of 10 flips, there are going to be plenty of people who flipped heads 10 times in a row. The problem is that the people who did this are not "better coin flippers", it's just luck.
Buy and Hold can also yield negative results. It seems obvious to me that MA trend-following will allow you to mitigate some of the losses during large market drawdowns. If one believes there will be no large market drawdowns in the future, then it will fail.
Is it really obvious? What rules to guarantee that?
There is a thread where willthrill81 has bravely documented his trend following approach. Unfortunately, he did not avoid the oct-dec drawdown of 20%, and then the signal had him get out in January, just in time to miss a nice run up.

His approach may well pay off in the long run, but it is not at all "obvious" that such approaches will avoid significant amount of the drawdown, and then they will also likely miss some of the recovery. Whether, the net result is better/worse than simply holding through the cycles is even less obvious.
None of the 'mainstream' trend following methods I've seen have avoided all or even most 20% drawdowns with regard to the stock portion of one's portfolio. And yes, whipsaws are an inevitable aspect of any trend following strategy, just as deep drawdowns are an inevitable aspect of a buy-and-hold approach. Each of us must determine which approach we both believe in and can stick with. I know what works for me, and my recent experiences have not at all shaken my belief in the viability of my strategy going forward.

That being said, there are several academic papers which have shown that even (perhaps, especially) simplistic trend following methods such as the 200 day moving average approach, which has been in use since at least the 1950s, have reduced drawdowns and actually generated a little alpha in the long-term. But it's important to keep in mind that any deviation from buy-and-hold of the entire market will certainly result in you lagging the market at times, potentially lasting many years. For instance, the 200 DMA approach would have trailed buy-and-hold significantly in the 1990s and 2010s, but from 2000-2009, it would have left you looking like a genius. And over the entire period, it would have resulted in a slightly higher absolute return but with less volatility and much lower maximum drawdowns. And if you had used bonds instead of cash as the out-of-market asset, which makes good sense to me, the strategy would have had significantly better results.

This gets to the heart of the OP: would you be able to stick with a strategy that is underperforming the market by a decade or longer? If not, then trend following may not a wise strategy for you. This also applies to factor investing, the U.S./international split, etc.
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HomerJ
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Re: Imperfect market timing still works -- if you stick with it

Post by HomerJ » Wed May 08, 2019 11:54 am

CULater wrote:
Wed May 08, 2019 9:43 am
Article examines the outcome of rules-based market timing and finds that it produces higher returns than buy-and-hold even if you miss the mark getting in and out by as much as one year. This outcome results primarily from avoiding at least some of the losses from large market declines of 20% or greater. However, to do this requires the discipline to tolerate frequent false positives and stick with your method over the long haul.
The "rules" in "rules-based" market timing were derived from back-testing. It's not guaranteed those same rules will work the same going forward.

You are correct that both "buy and hold" and "rules-based" market-timing investors have to have discipline.

Note that you can reduce the amount of discipline you need in buy and hold by increasing your bond allocation.

Buy and holding a 90/10 AA through the next crash would much harder for me than a 50/50 AA.

I prefer buy and hold because the big crashes are rarer for a buy and hold person. The false positives for the momentum investor happen more often. Also, it's easier to have faith in buy and hold. All you are believing is that the stock market general direction is up, over the long-term.

A momentum investor has to believe a certain set of signals that worked in the past will continue to work going forward. After multiple false positives where the signals seem to not be working anymore (and plenty of articles coming out showing a new improved better system), I would think it would be harder for a "rules-based" market-timer to stick with the original system (Especially since the guy you believed the first time for the original system is also probably publishing newer better systems in subsequent years)

Here's a suggestion. How about a combination of both systems?

Buy and hold 50% of your money in a 50/50 allocation. And use the "rules-based" system for the other 50%, moving from 100% stocks to 100% bonds with just 50% of your money.

Basically this just the same as swinging from 75/25 to 25/75 based on the "signals".

I still don't recommend that, but it would probably easier to stick to for most people than moving 100/0 to 0/100.
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Re: Imperfect market timing still works -- if you stick with it

Post by GrowthSeeker » Wed May 08, 2019 12:08 pm

CULater wrote:
Wed May 08, 2019 10:05 am
It seems obvious to me that MA trend-following will allow you to mitigate some of the losses during large market drawdowns.
I've spent many hours with downloaded data, spreadsheets, Tradestation and other software trying to find the holy grail of market timing. But no longer.
I spent hours looking up research which had already been done. For example, I can't find the ones I was reading 4 or 5 years ago, but a quick search found some similar web pages showing graphical representations of results of a technical indicator with 2 parameters with the result graphed on the 3rd axis, such as moving average crossovers or the MACD indicator. (Just look at the graphs, I wouldn't bother reading the articles.)

The point is: what indicator to pick, what parameters to pick and even what market to trade are are choices which are not obvious at all.
Just because you're paranoid doesn't mean they're NOT out to get you.

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greg24
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Re: Imperfect market timing still works -- if you stick with it

Post by greg24 » Wed May 08, 2019 12:17 pm

GrowthSeeker wrote:
Wed May 08, 2019 12:08 pm
The point is: what indicator to pick, what parameters to pick and even what market to trade are are choices which are not obvious at all.
They will be obvious after the fact, which someone will cite it as "proof" that market timing works.

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Re: Imperfect market timing still works -- if you stick with it

Post by MathWizard » Wed May 08, 2019 12:30 pm

They are comparing to Buy and Hold.

However, this ignores rebalancing, which does buy more equities when they are cheap relative to bonds,
and sells equities when they are expensive relative to bonds.

While rebalancing is a risk management strategy, it does produce different results than buy and hold, and I believe
better results at a given level of risk, because going beyond your risk tolerance causes behavioral issues, like selling in a
panic. By rebalancing, you can chose the highest level of your risk tolerance without going beyond your risk tolerance.

With buy and hold, over a bull run, equities will become a larger part of your portfolio, raising the percentage of equities
in your portfolio, increasing volatility, which we call risk. To have stayed within your risk tolerance, without rebalancing,
you would have had to started well below the maximum risk tolerance, which would provide a lower return than you could
have had with a higher initial risk in your AA, using rebalancing to keep you below your maximum risk comfort level.

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HomerJ
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Re: Imperfect market timing still works -- if you stick with it

Post by HomerJ » Wed May 08, 2019 12:35 pm

greg24 wrote:
Wed May 08, 2019 12:17 pm
GrowthSeeker wrote:
Wed May 08, 2019 12:08 pm
The point is: what indicator to pick, what parameters to pick and even what market to trade are are choices which are not obvious at all.
They will be obvious after the fact, which someone will cite it as "proof" that market timing works.
Exactly this.
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CULater
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Re: Imperfect market timing still works -- if you stick with it

Post by CULater » Wed May 08, 2019 12:45 pm

Using Portfolio Visualizer: Since 1993, a timing portfolio with trading intervals based on quarterly returns using the 10-month moving average with Vanguard's S&P 500 index fund and Cash as the reserve asset has produced 94% of the return of buy and hold with 72% of the annualized volatility and max drawdown of 21% compared to 51%. It had the same Sharpe ratio of 0.66 as a 60/40 portfolio allocation but produced a cumulative return that was 25% higher with a lower maximum drawdown. The correlation of the timing portfolio with the stock market (beta) was 0.7.

This timing model generated 21 trading signals over the last 26 years, averaging fewer than once per year. It underperformed buy and hold during seven of those periods and outperformed during three of those periods and matched during 11 of those periods. The obvious reason for the results of the timing portfolio was that it had negative returns only during two the the timing periods of -13% (Apr 2002 - Jun 2002) and -1% (Jan 2000 - Sep 2000), while the buy and hold portfolio had negative returns during four of those periods of -1% and - 13% (matching the two market timing periods), as well as -19% (Oct 2000 - March 2002) and -35% (Jan 2008 - Jun 2009).

Notably, the buy and hold portfolio has outperformed this timing model by a wide margin since 2012, but the timing portfolio has managed to keep pace with the 60/40 portfolio producing a CAGR of 9.8% compared to 9.5% with somewhat higher annualized volatility of 9.9% compared to 6.6%.

The proper benchmark for this timing portfolio would seem to the the 60/40 portfolio. During the most recent bull market it has about matched 60/40, but it offers more downside protection in the event of a severe bear market, which seems to offer the potential for higher long term returns with lower drawdown risk.
Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof. ~ John Kenneth Galbraith

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HomerJ
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Re: Imperfect market timing still works -- if you stick with it

Post by HomerJ » Wed May 08, 2019 12:55 pm

CULater wrote:
Wed May 08, 2019 12:45 pm
Using Portfolio Visualizer: Since 1993, a timing portfolio with trading intervals based on quarterly returns using the 10-month moving average with Vanguard's S&P 500 index fund and Cash as the reserve asset has produced 94% of the return of buy and hold with 72% of the annualized volatility and max drawdown of 21% compared to 51%. It had the same Sharpe ratio of 0.66 as a 60/40 portfolio allocation but produced a cumulative return that was 25% higher with a lower maximum drawdown. The correlation of the timing portfolio with the stock market (beta) was 0.7.

This timing model generated 21 trading signals over the last 26 years, averaging fewer than once per year. It underperformed buy and hold during seven of those periods and outperformed during three of those periods and matched during 11 of those periods. The obvious reason for the results of the timing portfolio was that it had negative returns only during two the the timing periods of -13% (Apr 2002 - Jun 2002) and -1% (Jan 2000 - Sep 2000), while the buy and hold portfolio had negative returns during four of those periods of -1% and - 13% (matching the two market timing periods), as well as -19% (Oct 2000 - March 2002) and -35% (Jan 2008 - Jun 2009).

Notably, the buy and hold portfolio has outperformed this timing model by a wide margin since 2012, but the timing portfolio has managed to keep pace with the 60/40 portfolio producing a CAGR of 9.8% compared to 9.5% with somewhat higher annualized volatility of 9.9% compared to 6.6%.

The proper benchmark for this timing portfolio would seem to the the 60/40 portfolio. During the most recent bull market it has about matched 60/40, but it offers more downside protection in the event of a severe bear market, which seems to offer the potential for higher long term returns with lower drawdown risk.
1993-present is not a long enough period for me to believe strongly enough in a system to stick with it.

Most of that period is where bonds and cash did pretty well, so switching out of stocks didn't hurt too much.

Bonds and cash are starting from a lower point today, so switching to 100% bonds or cash at the wrong time will impact your returns far more.

And again, it's a backtested model. Note it's a 10-month moving average. Why 10? Why not 12 or 8 or 16? Because they tried 12 and 8 and 16, and the numbers weren't as good.

10-month gave the best numbers for the exact period 1993-present. There's no universal law that says it will give the best numbers going forward.
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Re: Imperfect market timing still works -- if you stick with it

Post by marcopolo » Wed May 08, 2019 1:02 pm

willthrill81 wrote:
Wed May 08, 2019 11:38 am
marcopolo wrote:
Wed May 08, 2019 10:15 am
CULater wrote:
Wed May 08, 2019 10:05 am
jdilla1107 wrote:
Wed May 08, 2019 9:56 am
" the data suggests that using a quantitative, rules-based approach to market timing can yield positive results."

Of course it can. It can also yield negative results. :shock:

Lot's of people can be successful with market timing. The trick is picking who will be successful before hand. The classic example is 100,000 people all flipping quarters together. At the end of 10 flips, there are going to be plenty of people who flipped heads 10 times in a row. The problem is that the people who did this are not "better coin flippers", it's just luck.
Buy and Hold can also yield negative results. It seems obvious to me that MA trend-following will allow you to mitigate some of the losses during large market drawdowns. If one believes there will be no large market drawdowns in the future, then it will fail.
Is it really obvious? What rules to guarantee that?
There is a thread where willthrill81 has bravely documented his trend following approach. Unfortunately, he did not avoid the oct-dec drawdown of 20%, and then the signal had him get out in January, just in time to miss a nice run up.

His approach may well pay off in the long run, but it is not at all "obvious" that such approaches will avoid significant amount of the drawdown, and then they will also likely miss some of the recovery. Whether, the net result is better/worse than simply holding through the cycles is even less obvious.
None of the 'mainstream' trend following methods I've seen have avoided all or even most 20% drawdowns with regard to the stock portion of one's portfolio. And yes, whipsaws are an inevitable aspect of any trend following strategy, just as deep drawdowns are an inevitable aspect of a buy-and-hold approach. Each of us must determine which approach we both believe in and can stick with. I know what works for me, and my recent experiences have not at all shaken my belief in the viability of my strategy going forward.

That being said, there are several academic papers which have shown that even (perhaps, especially) simplistic trend following methods such as the 200 day moving average approach, which has been in use since at least the 1950s, have reduced drawdowns and actually generated a little alpha in the long-term. But it's important to keep in mind that any deviation from buy-and-hold of the entire market will certainly result in you lagging the market at times, potentially lasting many years. For instance, the 200 DMA approach would have trailed buy-and-hold significantly in the 1990s and 2010s, but from 2000-2009, it would have left you looking like a genius. And over the entire period, it would have resulted in a slightly higher absolute return but with less volatility and much lower maximum drawdowns. And if you had used bonds instead of cash as the out-of-market asset, which makes good sense to me, the strategy would have had significantly better results.

This gets to the heart of the OP: would you be able to stick with a strategy that is underperforming the market by a decade or longer? If not, then trend following may not a wise strategy for you. This also applies to factor investing, the U.S./international split, etc.
I agree with most of what you said above, particularly about choosing a strategy that you will be comfortable with and thus more likely to stick with when the strategy inevitably lags relative to other alternatives (same is true for buy and hold). What i was mostly commenting on was the part about it being obvious. Nothing about choosing the appropriate investing strategy seems very obvious to me. If it were, everyone would be doing it, then may be it would not be so great anymore....
Once in a while you get shown the light, in the strangest of places if you look at it right.

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CULater
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Re: Imperfect market timing still works -- if you stick with it

Post by CULater » Wed May 08, 2019 1:27 pm

You don't have to go crazy switching between 100% stocks and Cash or Bonds. For example, you could just move between 2/3 stocks and 1/3 stocks with the balance in bonds based on a timing signal. I used PV to move between Wellington (2/3 stocks) and Wellesley (1/3 stocks) based on the 10-month MA for stocks (S&P500 index). When the monthly price of stocks is above the MA you were 100% in Wellington and when below you were 100% in Wellesley. This was compared to being 100% in Wellington using buy-and-hold. Returns since 1985 are almost identical but you would have had about half the drawdown in 2008 following this strategy (9.8% vs. 22.3%) and the max drawdown would have been 19.8% vs. 32.5%. The Sharpe for the timing portfolio was 0.84 vs. 0.74 for Wellington.
Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof. ~ John Kenneth Galbraith

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Re: Imperfect market timing still works -- if you stick with it

Post by HomerJ » Wed May 08, 2019 1:42 pm

CULater wrote:
Wed May 08, 2019 1:27 pm
You don't have to go crazy switching between 100% stocks and Cash or Bonds. For example, you could just move between 2/3 stocks and 1/3 stocks with the balance in bonds based on a timing signal. I used PV to move between Wellington (2/3 stocks) and Wellesley (1/3 stocks) based on the 10-month MA for stocks (S&P500 index). When the monthly price of stocks is above the MA you were 100% in Wellington and when below you were 100% in Wellesley. This was compared to being 100% in Wellington using buy-and-hold.
The plan isn't terrible.
Returns since 1985 are almost identical
Again, 1985 to 2015 was a huge 30 year bull market for bonds. So yeah, returns were good either way. In that one period.

This may not be true going forward.
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klrjaa
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Re: Imperfect market timing still works -- if you stick with it

Post by klrjaa » Wed May 08, 2019 1:43 pm

Folks might want to take a look at Meta Strategy at the provided link
https://allocatesmartly.com/meta-strate ... trategies/

It has a history going back to 1973 and does a walk forward since you can't eat backtested returns. The site owners do a great job of explaining how it works. All the performance data is provided and paying members like myself can see the exact trades including the historical allocations, month by month performance and trade history.

With active TAA strategies, there's a easier ability for strategies to rotate out of bonds and there is certainly a recognition the go forward performance would be different, but that is addressed in a sensitivity analysis; which strategies are most interest rate sensitive which is pretty interesting. They also track a number of static strategies that can be combined into the allocation framework and have opened another site more suited to buy and hold as there's the recognition not everyone wants full TAA. That other site has just released results 16 portfolio charts portfolios and shows expected currentized returns given the current interest rate environment.

I am in no way associate with these sites other than being a paying member. It's not free, but cost/value all depends on one's point of view as well as bankroll. Hope this helps thanks

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Ged
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Re: Imperfect market timing still works -- if you stick with it

Post by Ged » Wed May 08, 2019 1:55 pm

Do any of these analyses include effects of taxation?

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CULater
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Re: Imperfect market timing still works -- if you stick with it

Post by CULater » Wed May 08, 2019 1:56 pm

Then there's this:
As the chart below shows, trend-following outperformance has occurred at a much higher rate than a coin flip and that beat rate has increased over longer periods. This specific 12-month trend model outperformed a 60/40 portfolio over ~80% of rolling 60-month time frames since 1926 and 90%+ of the time over 10 and 15 year periods.
Image

https://econompicdata.blogspot.com/2018 ... efits.html
Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof. ~ John Kenneth Galbraith

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Re: Imperfect market timing still works -- if you stick with it

Post by willthrill81 » Wed May 08, 2019 1:57 pm

marcopolo wrote:
Wed May 08, 2019 1:02 pm
I agree with most of what you said above, particularly about choosing a strategy that you will be comfortable with and thus more likely to stick with when the strategy inevitably lags relative to other alternatives (same is true for buy and hold). What i was mostly commenting on was the part about it being obvious. Nothing about choosing the appropriate investing strategy seems very obvious to me. If it were, everyone would be doing it, then may be it would not be so great anymore....
I entirely agree. I find it very interesting and a bit frustrating when some make comments claiming that X investment strategy with Y allocation is the 'default approach' and that anything else is a 'bet', as if their approach is somehow not.
“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: Imperfect market timing still works -- if you stick with it

Post by willthrill81 » Wed May 08, 2019 2:01 pm

CULater wrote:
Wed May 08, 2019 1:56 pm
Then there's this:
As the chart below shows, trend-following outperformance has occurred at a much higher rate than a coin flip and that beat rate has increased over longer periods. This specific 12-month trend model outperformed a 60/40 portfolio over ~80% of rolling 60-month time frames since 1926 and 90%+ of the time over 10 and 15 year periods.
Image

https://econompicdata.blogspot.com/2018 ... efits.html
Part of the reason for the seemingly increasing outperformance of trend following over longer time frames can be easily explained: the longer the time frame investigated, the more likely that one of the major stock market declines such as the Great Depression will be included in the rolling period, and trend following has generally performed well in such periods.
“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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CULater
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Re: Imperfect market timing still works -- if you stick with it

Post by CULater » Wed May 08, 2019 2:12 pm

Part of the reason for the seemingly increasing outperformance of trend following over longer time frames can be easily explained: the longer the time frame investigated, the more likely that one of the major stock market declines such as the Great Depression will be included in the rolling period, and trend following has generally performed well in such periods.
Which raises the issue of why trend following wouldn't actually be a superior long-term investing strategy, yes? Another matter that is relevant is that trend following seems to have been a better strategy during periods when the beginning expected returns from stocks was low. One explanation is that those were periods when stocks appeared overvalued and consequently seemed more likely to experience severe drawdowns -- as in now.
Last edited by CULater on Wed May 08, 2019 2:13 pm, edited 1 time in total.
Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof. ~ John Kenneth Galbraith

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Re: Imperfect market timing still works -- if you stick with it

Post by LittleD » Wed May 08, 2019 2:13 pm

For the many who love the mixed portfolio (60/40) and are game to do that with just two ETF, I offer the 12% solution which offers the chance/potential to beat a benchmark of buy and hold. It does some timing and switching of the two funds at times. The volatility of the portfolio is reduced and seems like a 2-hour/once a month exercise.

https://www.roboticinvesting.com/2018/0 ... g-summary/

The book, for those who might like to explore is available on Amazon.

This site has a test portfolio running in real time. It is not the system I use but, I find the approach reasonable for those getting nervous.

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Re: Imperfect market timing still works -- if you stick with it

Post by CULater » Wed May 08, 2019 3:36 pm

Of some interest for followers of Paul Merriman is that he's a market timer:
As I mentioned, I have half of my own portfolio governed by mechanical market timing, and I've been successful. But the only way I can succeed is to have somebody else do the computations and make the trades for me.

If I had to do all that myself, I would soon be an emotional wreck and would probably abandon the discipline.

Another reason timing works for me is that it governs only about half of my investments. The rest, I own on a buy-and-hold basis. I understand that in some years buy-and-hold will do better than timing, and vice versa.

Having some of each ensures that I'll always have at least a big part of my portfolio in whichever approach is outperforming. I know other investors who use this same approach, and they report that this dual strategy gives them added peace of mind.
https://www.marketwatch.com/story/how-t ... 2015-06-24

This approach can make some sense, since the market-timed portion of the portfolio can be regarded as a synthetic "asset" with a correlation of about .7 with the total stock market, which provides some diversification benefit.
Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof. ~ John Kenneth Galbraith

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CULater
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Re: Imperfect market timing still works -- if you stick with it

Post by CULater » Wed May 08, 2019 3:53 pm

CULater wrote:
Wed May 08, 2019 1:27 pm
You don't have to go crazy switching between 100% stocks and Cash or Bonds. For example, you could just move between 2/3 stocks and 1/3 stocks with the balance in bonds based on a timing signal. I used PV to move between Wellington (2/3 stocks) and Wellesley (1/3 stocks) based on the 10-month MA for stocks (S&P500 index). When the monthly price of stocks is above the MA you were 100% in Wellington and when below you were 100% in Wellesley. This was compared to being 100% in Wellington using buy-and-hold. Returns since 1985 are almost identical but you would have had about half the drawdown in 2008 following this strategy (9.8% vs. 22.3%) and the max drawdown would have been 19.8% vs. 32.5%. The Sharpe for the timing portfolio was 0.84 vs. 0.74 for Wellington.
Not unlike the advice of Benjamin Graham, using trend-following signals to mechanically vary one's stock allocation between 25% and 75%:
“The sound reason for increasing the percentage in common stocks [beyond 50%] would be the appearance of ‘bargain price’ levels created in a protracted bear market. Conversely, sound procedure would call for reducing the common-stock component below 50% when in the judgment of the investor the market level has become dangerously high.”
Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof. ~ John Kenneth Galbraith

klrjaa
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Re: Imperfect market timing still works -- if you stick with it

Post by klrjaa » Wed May 08, 2019 4:38 pm

Ged wrote:
Wed May 08, 2019 1:55 pm
Do any of these analyses include effects of taxation?
The allocate smartly site I referenced does. For each TAA strategy, it shows the % of gains that are long term, short term, dividends, and interest. You can also set up custom portfolios where it would might make sense to combine tax favorable strategies (high percentage of long term capital gains) into a taxable account and vice versa. FWIW It does the same in an analysis of exposure to rising interest rates as well as exposure to a rising or falling US dollar

edit: it does this for all strategies including a handful of static they track
Last edited by klrjaa on Wed May 08, 2019 4:49 pm, edited 1 time in total.

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Re: Imperfect market timing still works -- if you stick with it

Post by willthrill81 » Wed May 08, 2019 4:47 pm

CULater wrote:
Wed May 08, 2019 2:12 pm
Part of the reason for the seemingly increasing outperformance of trend following over longer time frames can be easily explained: the longer the time frame investigated, the more likely that one of the major stock market declines such as the Great Depression will be included in the rolling period, and trend following has generally performed well in such periods.
Which raises the issue of why trend following wouldn't actually be a superior long-term investing strategy, yes? Another matter that is relevant is that trend following seems to have been a better strategy during periods when the beginning expected returns from stocks was low. One explanation is that those were periods when stocks appeared overvalued and consequently seemed more likely to experience severe drawdowns -- as in now.
Indeed that may be the case. Most trend following systems didn't work so well for most of the 1980s and 1990s, although many of them actually avoided the crash in October of 1987. But following the very high valuations of 2000, every trend following system I've seen did well in the following decade. Since 2009, most of them have once again lagged the market. But over the long-term, trend following appears to have been effective at increasing risk-adjusted returns by capturing most or all of the market's gains while avoiding the worst of the market's declines. Whether that will hold true going forward is another matter altogether.

That being said, I really don't know how many investors out there could have stuck with a trend following system that lagged the market significantly for nearly 20 years, as happened from 1981-2000, as most did. But OTOH, I don't know how many could have stuck with buy-and-hold through the Great Depression's 89% stock drawdown either.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Imperfect market timing still works -- if you stick with it

Post by CULater » Wed May 08, 2019 4:58 pm

That being said, I really don't know how many investors out there could have stuck with a trend following system that lagged the market significantly for nearly 20 years, as happened from 1981-2000, as most did. But OTOH, I don't know how many could have stuck with buy-and-hold through the Great Depression's 89% stock drawdown either.
Perhaps an argument for going 50/50 between BAH and MT, as Merriman does? You'll be at least half-right over the long run. Question is - can you stick with the half that isn't right over a decade or two?
Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof. ~ John Kenneth Galbraith

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Re: Imperfect market timing still works -- if you stick with it

Post by willthrill81 » Wed May 08, 2019 5:09 pm

CULater wrote:
Wed May 08, 2019 4:58 pm
That being said, I really don't know how many investors out there could have stuck with a trend following system that lagged the market significantly for nearly 20 years, as happened from 1981-2000, as most did. But OTOH, I don't know how many could have stuck with buy-and-hold through the Great Depression's 89% stock drawdown either.
Perhaps an argument for going 50/50 between BAH and MT, as Merriman does? You'll be at least half-right over the long run. Question is - can you stick with the half that isn't right over a decade or two?
Yes, both Paul Merriman and Meb Faber do a 50/50 split between the two strategies, which could be a prudent strategy, but you're correct in questioning whether an investor could stay the course with the underperforming half of their portfolio. Look at how many folks here are talking about dumping their 20% stake in international due to its underperformance compared to U.S. stock for a long while now.

To be frank, I really don't believe that many people are being brutally honest with themselves in regards to their investment strategy. We had some 'die hard' buy-and-hold proponents around here who were talking about 'plan B' back in 2008 when the market was down 50%. That was bad, but the Great Depression's 89% decline was much worse. And if that were to happen again, do we really believe that U.S. bonds' value wouldn't potentially be in peril? What if inflation was just half as bad as it was during the stagflation of the 1970s and early 1980s, when the real value of the dollar was halved and intermediate- and long-term Treasuries had drawdowns of over 30% and 45%, respectively? I'm not talking about the zombie apocalypse; these were real events that happened in the largest economy in the world within the last century. Some may choose to believe that they couldn't happen again, but I don't believe that it's prudent to blindly assume that something that has happened cannot happen again. These are some of the 'deep risks' that I'm at least attempting to guard against with my strategy. I might fail miserably in this effort, but at least I tried.
“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

klrjaa
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Re: Imperfect market timing still works -- if you stick with it

Post by klrjaa » Wed May 08, 2019 5:11 pm

I think it depends on one's timeframe. Younger folks could better withstand a buy and hold as larger drawdowns are opportunities for more efficient dollar cost averaging. Plus their personal capital is large since many remaining years in the work force. Someone like me closer to retirement I'd think would be more concerned with eliminating larger drawdowns and maybe more geared towards TAA as returns become secondary

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Re: Imperfect market timing still works -- if you stick with it

Post by jdilla1107 » Wed May 08, 2019 5:22 pm

willthrill81 wrote:
Wed May 08, 2019 5:09 pm
These are some of the 'deep risks' that I'm at least attempting to guard against with my strategy. I might fail miserably in this effort, but at least I tried.
Why not just carry some put options to ensure your portfolio against a deep risk? Say 30% below current market levels.

I am not recommending this, but it's a heck of a lot better than this statement "I might fail miserably in this effort, but at least I tried." The idea that doing something (that might be entirely unproductive) is better than doing nothing is a really terrible. Sorry.

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Re: Imperfect market timing still works -- if you stick with it

Post by willthrill81 » Wed May 08, 2019 5:26 pm

jdilla1107 wrote:
Wed May 08, 2019 5:22 pm
willthrill81 wrote:
Wed May 08, 2019 5:09 pm
These are some of the 'deep risks' that I'm at least attempting to guard against with my strategy. I might fail miserably in this effort, but at least I tried.
Why not just carry some put options to ensure your portfolio against a deep risk? Say 30% below current market levels.
That's a possibility, but it would be difficult for me to implement in my portfolio, which is all in tax-advantaged accounts. Further, history has shown that such options have a negative expected value, while my chosen strategy has a positive expected value.
jdilla1107 wrote:
Wed May 08, 2019 5:22 pm
I am not recommending this, but it's a heck of a lot better than this statement "I might fail miserably in this effort, but at least I tried." The idea that doing something (that might be entirely unproductive) is better than doing nothing is a really terrible. Sorry.
I don't take offense. But said as respectfully as I can with typed words, if you believe that your investment strategy, whatever it is, absolutely won't fail, I believe that you're faith is misplaced. State insurance guaranty associations aren't iron-clad. Stock markets can and have gone to zero. Governments have defaulted on their bonds and even their entire currencies many times. All roads carry risk.

"Life is pain, Highness. Anyone who says otherwise is selling something."
-The Princess Bride
“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: Imperfect market timing still works -- if you stick with it

Post by WildBill » Wed May 08, 2019 5:49 pm

Howdy

I am lazy, inattentive, slothful, suspicious of even minor complexity and like to nap.

Buy and hold is the only possible option for me.

WB
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid

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Re: Imperfect market timing still works -- if you stick with it

Post by randomguy » Wed May 08, 2019 5:51 pm

willthrill81 wrote:
Wed May 08, 2019 5:26 pm
jdilla1107 wrote:
Wed May 08, 2019 5:22 pm
I am not recommending this, but it's a heck of a lot better than this statement "I might fail miserably in this effort, but at least I tried." The idea that doing something (that might be entirely unproductive) is better than doing nothing is a really terrible. Sorry.
I don't take offense. But said as respectfully as I can with typed words, if you believe that your investment strategy, whatever it is, absolutely won't fail, I believe that you're faith is misplaced. State insurance guaranty associations aren't iron-clad. Stock markets can and have gone to zero. Governments have defaulted on their bonds and even their entire currencies many times. All roads carry risk.

"Life is pain, Highness. Anyone who says otherwise is selling something."
-The Princess Bride
I think that point that is trying to be made is that trying has no value. Do something to do something doesn't help you. You need to do something that it is reasonable to expect to do work. If I sell when my gut tells me stocks are overvalued, I am doing something. Odds are against me be right often enough.

I think the idea of going 100%->0% based on some signal is crazy:). Go from 40/60 to 60/40, I might be able to talk my self into.:) I could justify either of those AA so to some extent the choice doesn't matter. Now there is a risk that switching up costs you money over the long term (i.e nobody cases about 1 or 2 3 month periods. We care about all the choices over a decade) but that might be an acceptable risk to take on. It really comes down to how much you believe in the system.

You have the same issue with any deviation from the index. SV worked out great for me. The first couple years in the late 90s though were rough. If I would have switched at the end of 99, I would have missed out on all the outperformance. Pick something sane and stay the course.

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Re: Imperfect market timing still works -- if you stick with it

Post by willthrill81 » Wed May 08, 2019 5:58 pm

randomguy wrote:
Wed May 08, 2019 5:51 pm
willthrill81 wrote:
Wed May 08, 2019 5:26 pm
jdilla1107 wrote:
Wed May 08, 2019 5:22 pm
I am not recommending this, but it's a heck of a lot better than this statement "I might fail miserably in this effort, but at least I tried." The idea that doing something (that might be entirely unproductive) is better than doing nothing is a really terrible. Sorry.
I don't take offense. But said as respectfully as I can with typed words, if you believe that your investment strategy, whatever it is, absolutely won't fail, I believe that you're faith is misplaced. State insurance guaranty associations aren't iron-clad. Stock markets can and have gone to zero. Governments have defaulted on their bonds and even their entire currencies many times. All roads carry risk.

"Life is pain, Highness. Anyone who says otherwise is selling something."
-The Princess Bride
I think that point that is trying to be made is that trying has no value. Do something to do something doesn't help you. You need to do something that it is reasonable to expect to do work. If I sell when my gut tells me stocks are overvalued, I am doing something. Odds are against me be right often enough.

I think the idea of going 100%->0% based on some signal is crazy:). Go from 40/60 to 60/40, I might be able to talk my self into.:) I could justify either of those AA so to some extent the choice doesn't matter. Now there is a risk that switching up costs you money over the long term (i.e nobody cases about 1 or 2 3 month periods. We care about all the choices over a decade) but that might be an acceptable risk to take on. It really comes down to how much you believe in the system.

You have the same issue with any deviation from the index. SV worked out great for me. The first couple years in the late 90s though were rough. If I would have switched at the end of 99, I would have missed out on all the outperformance. Pick something sane and stay the course.
I truly believe that what I'm doing is the best course of action for me and have no intention of deviating from it. At the same time, I will not be so arrogant as to say that I know that my strategy will perform exactly as I intend for it to. That's all that I meant.
“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: Imperfect market timing still works -- if you stick with it

Post by TropikThunder » Wed May 08, 2019 8:37 pm

Why do these kind of timing strategies work in the long run? Because they fail a lot.
Seriously?

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Re: Imperfect market timing still works -- if you stick with it

Post by JoMoney » Wed May 08, 2019 8:54 pm

WildBill wrote:
Wed May 08, 2019 5:49 pm
Howdy

I am lazy, inattentive, slothful, suspicious of even minor complexity and like to nap.

Buy and hold is the only possible option for me.

WB
:thumbsup
And if properly measured over the same time period, you're certain to do better than half the money that attempts to jump in and out of the same assets (except they'll have additional expenses and tax implications).
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Imperfect market timing still works -- if you stick with it

Post by CULater » Wed May 08, 2019 9:32 pm

I think that willthrill81's point about being able to tolerate deep market losses is an important one, especially for investors who have accumulated a significant amount in their portfolio and may also be nearing their retirement or are in their retirement and living off their portfolio. That's a real behavioral risk for buy and hold diehards. Seems to me that trend following might be an easier strategy to stick to over the long run because you are guaranteed to be out of the market well before those deep losses materialize. This might seem reassuring enough to allow one allocate more to stocks than they might be comfortable doing with buy and hold. Being a nervous investor, especially these days, that's the way I think it would work for me.
Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof. ~ John Kenneth Galbraith

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Re: Imperfect market timing still works -- if you stick with it

Post by HomerJ » Wed May 08, 2019 10:10 pm

CULater wrote:
Wed May 08, 2019 3:36 pm
Of some interest for followers of Paul Merriman is that he's a market timer:
As I mentioned, I have half of my own portfolio governed by mechanical market timing, and I've been successful. But the only way I can succeed is to have somebody else do the computations and make the trades for me.

If I had to do all that myself, I would soon be an emotional wreck and would probably abandon the discipline.
Did you note this part?

Don't you think that's pretty important? If he can't do it, should we really recommend novice investors to do it?
The J stands for Jay

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CULater
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Re: Imperfect market timing still works -- if you stick with it

Post by CULater » Wed May 08, 2019 10:15 pm

Using Portfolio Visualizer, it appears that with the quarterly market timing model (trade between VTSMX and Cash based on price being above or below the quarterly moving average) would have been in cash for 69 of the 300 months from 1994 - 2019, which is about 25% of the time -- so the average stock allocation over this period would have been about 75%.

Comparing market timing results to the results of a static 75% stock / 25% cash portfolio over this time period finds that timing produced a CAGR of 8.2%, SD of 10.75% , Sharpe of 0.57, with a max drawdown of 23.4%. The static 75/25 allocation produced a CAGR of 7.6%, SD of 11%, Sharpe of 0.51 and a max drawdown of 39.4%.

It would appear that timing resulted in a higher absolute and risk-adjusted returns and lower maximum drawdown than a static portfolio allocation that matches the average allocation of the timing portfolio over this period. This is consistent with the view that a primary advantage of timing seems to be the mitigation of significant market drawdowns.
Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof. ~ John Kenneth Galbraith

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