My trend following strategy and experience

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willthrill81
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My trend following strategy and experience

Post by willthrill81 » Thu Jan 17, 2019 7:16 pm

Most of those who have been around here long know that I'm a trend follower. Yes, this means that I time the market, but I use a carefully researched system to do so. It is entirely objective; there is no subjective element as to what I should do (i.e. no feelings or guesses). Yes, there were certainly aspects of subjectivity that went into the creation of this strategy, such as my decision to use a 7 month moving average for part of it (more on that below), but it is now an objective one.

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 know that it would be difficult for me to just do nothing when the news is terrible and stocks are dropping precipitously as they did a decade ago. But I also know that it would be difficult for me to hang on to a significant portion of fixed income investments when things look good and stocks are on a tear. In other words, I do not believe that I am well suited to buy-and-hold. The biggest 'problem' with buy-and-hold is the inevitable drawdowns that have occurred repeatedly throughout history and will undoubtedly occur again in the future; this can be partially mitigated with one's choice of asset class, but this largely mutes returns at the same time. Now the 'problem' with trend following is that it has often trailed stocks during bull markets, and this can go on for a long time. For instance, the widely used 200 day moving average strategy has trailed the market significantly (~2% annually, depending on the 'out of market' asset used) since 2009.

After spending countless hours researching trend following, I decided to permanently switch to it in late 2017. The particular system that I use has two elements to it. The first has to do with whether I should be in stocks or fixed income, preferably short-term bonds, stable-value funds, etc. The second has to do with which stock index to invest in when I should be in stocks.

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 here.) 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 have had lower performance than that of bond indexes over the prior 7 months (the Philosophical Economist used the 10 month moving average, which is roughly analogous to the widely used 200 day moving average, but I prefer the 7 month moving average as it reacts more quickly to changes in the trend, although I don't expect a significant difference between the two over time as backtesting has shown results to be fairly stable over the long-term from a 3 month moving average out to beyond 1 year). As such, this is a very 'long-biased' system (i.e. it keeps you in stocks more so than most other trend following systems); from 1948 through 2016, it would have remained in stocks about 85% of the time. The UER is used as a recession indicator; for every recession that occurred since 1948, the UER first moved above its 12 month moving average. The average lead time was about 3.5 months, with a range of 0 to 8 months. However, there have been a few times when the UER crossed above the 12 month moving average but no recession occurred. This is where the second part of the strategy, the moving average of the stock indexes, comes in. It serves as what the Philosophical Economist calls a "double confirmation of danger that forces the strategy to take a safe position." The backtested results of this strategy were very good (i.e. better absolute returns, lower drawdowns) but should obviously be viewed with many grains of salt as it is not difficult to craft a strategy that would have performed well with the advantage of hindsight.

So part 1 of the systems tells me when to be in stocks or not. Part 2 tells me which stock indexes to be. That part is very simple: I invest 100% into the stock index that had the highest relative performance over the prior 7 months. This is similar to Gary Antonnaci's dual momentum approach. The number of stock indexes that I have access to is actually fairly limited because all of my investments are in tax-advantaged space, and I don't have many options in my 401k, very few in my 457, and a good number in my HSA, but no limit in my IRA. Consequently, one of my accounts may be in small-cap value while another is in a REIT index, for instance. Since I started using this approach, I've mainly been in large-cap growth.

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.

The primary reason I'm posting all of this is for the sake of those who have asked me to post when I moved out of stocks, as well as to serve as record of the experiment I'm doing. I know that my portfolio is a sort of guinea pig, and I know that the long-term results of my strategy may be poor. But I believe very firmly that this is a strategy that I can stick with, and even if my returns lag those of the market for a long time, I'm willing to do so because I believe that I am likely to have some kind of downside protection while hopefully not at the expense of sacrificing upside potential. I might not achieve this goal, but that's alright. We save approximately 50% of our gross income, and I frankly don't need great returns to become financially independent at a very respectable age. A 4% average real return should result in us being comfortably financially independent by the time I'm 55, and if that must be pushed back, that's fine too.

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.

UPDATE: 6/29/2019

401k: YTD nominal return = 6.9%
Jan: TIAA Real Estate (TREA) for half the month, as noted earlier in the thread
Feb: TREA
Mar: MCG
Apr: MCG
May: MCG
Jun: MCG

IRA: YTD nominal return = 3.1%
Jan: STT for half the month, as noted earlier in the thread
Feb: STT
Mar: MCG
Apr: EM
May: EM
Jun: EM

For comparison, an allocation of 85% TSM / 15% TBM would have returned 16.7%, and an allocation of 42.5% TSM / 42.5% ex-U.S. / 15% TBM would have returned 14.4%.
Last edited by willthrill81 on Sat Jun 29, 2019 9:56 pm, edited 4 times in total.
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hdas
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Re: My trend following strategy and experience

Post by hdas » 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
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: My trend following strategy and experience

Post by willthrill81 » 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.
“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 Nowizard » Thu Jan 17, 2019 7:40 pm

Interesting approach that is "non-boglehead," of course. I like those who are obviously intelligent and thoughtful that take a different approach, own it, but are not critical of those who take different approaches. Let us know how it turns out. Here's hoping you are one of those who do well with your approach that is not the one followed by most folks posting here. If simplicity is ideal, and maximization of returns is the presumed goal, why not consider the Buffett (One or two "t's?) approach?


Tim
Last edited by Nowizard on Thu Jan 17, 2019 7:46 pm, edited 1 time in total.

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Re: My trend following strategy and experience

Post by Blueskies123 » Thu Jan 17, 2019 7:41 pm

Aside from the time you spent setting all this up, how much time do you expect to spend on this approach each month? Does the time vary month to month or day to day? Do you have to follow the market daily?
Did you consider trying to find a trend following ETF or mutual fund with low costs?

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Re: My trend following strategy and experience

Post by goblue100 » Thu Jan 17, 2019 7:41 pm

I'm interested. I question whether you will see much difference from. say, a 60/40 portfolio. But as I say, I'm interested. Please keep posting the signals.
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Re: My trend following strategy and experience

Post by willthrill81 » Thu Jan 17, 2019 7:50 pm

Blueskies123 wrote:
Thu Jan 17, 2019 7:41 pm
Aside from the time you spent setting all this up, how much time do you expect to spend on this approach each month? Does the time vary month to month or day to day? Do you have to follow the market daily?
Good questions. It only takes me about two minutes once per month to see if I need to make any trades; I only use end of month prices. I have the seven month moving average and all of the available indexes already set up in Portfolio Visualizer. Examining the UER moving average can be done in about two minutes using the BLS data.
Blueskies123 wrote:
Thu Jan 17, 2019 7:41 pm
Did you consider trying to find a trend following ETF or mutual fund with low costs?
Not really. I favor a hands-on approach, and I've not found a fund that does what I want. Further, even if such a fund existed, I wouldn't be able to use it in my 401k, 457, or HSA.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: My trend following strategy and experience

Post by willthrill81 » Thu Jan 17, 2019 7:52 pm

Nowizard wrote:
Thu Jan 17, 2019 7:40 pm
Interesting approach that is "non-boglehead," of course. I like those who are obviously intelligent and thoughtful that take a different approach, own it, but are not critical of those who take different approaches. Let us know how it turns out. Here's hoping you are one of those who do well with your approach that is not the one followed by most folks posting here. If simplicity is ideal, and maximization of returns is the presumed goal, why not consider the Buffett (One or two "t's?) approach?

Tim
Thanks for the kind words. While 'timing the market' is not typical Boglehead strategy, I am 'staying the course' with my strategy. :wink:

I certainly don't think that this type of strategy is appropriate for everyone, but I believe that it will work well enough 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 » Thu Jan 17, 2019 7:53 pm

goblue100 wrote:
Thu Jan 17, 2019 7:41 pm
I'm interested. I question whether you will see much difference from. say, a 60/40 portfolio. But as I say, I'm interested. Please keep posting the signals.
Considering that historically it would have been in stocks about 85% of the time, if the only thing that mattered was 'time in the market', we could expect it to be roughly equivalent to an 85/15 AA. And if that happens, I'll be satisfied.
“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 sixtyforty » Thu Jan 17, 2019 8:09 pm

The biggest has to do with regret minimization, something that I have become far more attracted to over time than return optimization. I know that it would be difficult for me to just do nothing when the news is terrible and stocks are dropping precipitously as they did a decade ago. But I also know that it would be difficult for me to hang on to a significant portion of fixed income investments when things look good and stocks are on a tear. In other words, I do not believe that I am well suited to buy-and-hold. The biggest 'problem' with buy-and-hold is the inevitable drawdowns that have occurred repeatedly throughout history...
I definitely understand where you are coming from. Good luck and keep posting...
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Re: My trend following strategy and experience

Post by Mountain Doc » Thu Jan 17, 2019 8:25 pm

Although I would never adopt a strategy like this, I really enjoy the color it adds to the forum. You and Market Timer are two of my favorite posters, because you both take unique but reasoned approaches to personal investing. Frankly, reading about three-fund portfolios (like mine) grows really dull.
Best of luck, and I will enjoy following along. :sharebeer

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Re: My trend following strategy and experience

Post by bluquark » Thu Jan 17, 2019 8:35 pm

It has crossed my mind that a strategy of being 100% stocks on odd-numbered months and 100% bonds on even-numbered months probably has a risk/return profile similar to a 50/50 allocation, modulo the extreme up or down months that come now and then in history. Likewise your strategy probably will have similar returns to a conventional 85/15 allocation.

Assuming you can robotically stick to your plan, it might turn out that the biggest problem with it is tax-inefficiency -- you'll realize all your capital gains every time you go into fixed-income.

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Re: My trend following strategy and experience

Post by bgf » Thu Jan 17, 2019 8:37 pm

there is so little data on the interplay of recessions, unemployment, and stock market returns that i cannot imagine thinking this is a 'data driven' strategy. there's just not enough.

i do really like the philosophical economics blog though. been reading it for a few years now i think.
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Re: My trend following strategy and experience

Post by ResearchMed » Thu Jan 17, 2019 8:38 pm

bluquark wrote:
Thu Jan 17, 2019 8:35 pm
It has crossed my mind that a strategy of being 100% stocks on odd-numbered months and 100% bonds on even-numbered months probably has a risk/return profile similar to a 50/50 allocation, modulo the extreme up or down months that come now and then in history. Likewise your strategy probably will have similar returns to a conventional 85/15 allocation.

Assuming you can robotically stick to your plan, it might turn out that the biggest problem with it is tax-inefficiency -- you'll realize all your capital gains every time you go into fixed-income.
I think they've got mostly tax-advantaged (deferred) accounts, so this isn't going to be a huge problem for them.

RM
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Re: My trend following strategy and experience

Post by yukonjack » Thu Jan 17, 2019 8:39 pm

Will I always enjoy reading your posts and appreciate your investment knowledge. I personally go with what I perceive as a more simplified approach (a traditional 3 fund option). I would not feel comfortable making important investment decisions on an ever changing landscape. It’s enough for me to decide when to rebalance. I do look forward to reading about your future results though.

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Re: My trend following strategy and experience

Post by livesoft » Thu Jan 17, 2019 8:46 pm

Thanks for posting. It is important to publicly describe one's strategy because it helps one to follow it to the letter. Essentially this is your IPS.

You are bold to have this for 100% of your assets. Or maybe you have stash of an 80/20 fund like a LifeStrategy Growth hanging around somewhere. That might be a good benchmark to compare your portfolio to or perhaps an 85/15 one entered in Portfolio Visualizer. You do have a benchmark in mind for comparison, right?
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Re: My trend following strategy and experience

Post by willthrill81 » Thu Jan 17, 2019 8:55 pm

livesoft wrote:
Thu Jan 17, 2019 8:46 pm
You are bold to have this for 100% of your assets. Or maybe you have stash of an 80/20 fund like a LifeStrategy Growth hanging around somewhere. That might be a good benchmark to compare your portfolio to or perhaps an 85/15 one entered in Portfolio Visualizer. You do have a benchmark in mind for comparison, right?
No, I don't have a 'side portfolio'. Both Paul Merriman and Meb Faber use a trend following system with half of their portfolio and are buy-and-hold with the other half. I completely understand why they do so, but I'm very comfortable with my all-in approach.

I've considered my benchmark for returns to be VTSAX, though an 85/15 of VTSAX/VBTLX might be more realistic considering that I am not in stocks all the time. I'll post the results of both 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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Re: My trend following strategy and experience

Post by dogagility » Thu Jan 17, 2019 9:17 pm

Interesting. This isn't my approach; however, I appreciate your transparency and will grab my popcorn to follow your thread.

One question: How will you know when your plan is a success and by what metric? (You stated that one year's data is insufficient to gauge success.)
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Re: My trend following strategy and experience

Post by sunnywindy » Thu Jan 17, 2019 9:18 pm

I've become interested in trend following only because I want to understand all of the different strategies out there. I find the more I know about the markets, the less nervous I am about the markets and then nothing surprises me (I will admit market drops don't really bother me at all as I survived the '87 Black Monday and we won't ever see anything like that again because of the 'circuit breakers' so it's no problemo!).

One fund that I do like is Shiller's CAPE ETN (CAPE) or the more complex Double Line version (DSENX). Good luck!
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Re: My trend following strategy and experience

Post by Portfolio7 » Thu Jan 17, 2019 9:34 pm

willthrill81 wrote:
Thu Jan 17, 2019 7:52 pm
Nowizard wrote:
Thu Jan 17, 2019 7:40 pm
Interesting approach that is "non-boglehead," of course. I like those who are obviously intelligent and thoughtful that take a different approach, own it, but are not critical of those who take different approaches. Let us know how it turns out. Here's hoping you are one of those who do well with your approach that is not the one followed by most folks posting here. If simplicity is ideal, and maximization of returns is the presumed goal, why not consider the Buffett (One or two "t's?) approach?

Tim
Thanks for the kind words. While 'timing the market' is not typical Boglehead strategy, I am 'staying the course' with my strategy. :wink:

I certainly don't think that this type of strategy is appropriate for everyone, but I believe that it will work well enough for me.
I find this very interesting, not just the approach but the way you implement it. I realize that your approach is not about chasing returns, but adjusting the risk profile to match your personality/money attitudes. Firstly, the all-in, all-out approach. I do a TAA overlay, on 6.5 equity classes (the 7th has a half weighting) which have a default allocation of 65% of my portfolio. That allocation can shift between 78% and 52% (but is typically about 70%.) I use a 200 day moving average, but with some additional rules to try to fine tune it. In the course of a year, this portfolio outperformed my base portfolio by about 1%, but like you, I've only been doing this for a year. I'm trying to balance my desire to act with my desire to not fall too far behind when the market does well. I also purposely created a system where missing a signal doesn't hurt me. My work hours are long and unpredictable, so if I'm just buried for a month and I don't shift an equity class a bit, I might take a small hit, but odds are that the damage will be tiny or none, and I can live with it even if I am very late on an adjustment or 3.

I also use the UER, as a 'heightened risk' indicator. I will overweight the minimum volatility fund and stable value fund while that condition exists, and do so more the longer it exists, but I limit how much I can move from equities to fixed income (or vice versa) to 10% in any month. That way I limit my ability to over-react. I examine indicators roughly once per month (I have a frequency limitation of 30 days on my 401k), and have not done so in 2019 yet.

I appreciate your willingness to post your process, and look forward to updates.
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Re: My trend following strategy and experience

Post by Horton » Thu Jan 17, 2019 9:57 pm

Thanks for posting. It's a good summary. I'll bookmark the post and look forward to future updates.

I've been drawn to trend following as well and have studied it extensively. I actually tried to give it a shot with a portion of my portfolio and got whipsawed immediately (Aug/Sep 2015, I believe). In the end, I decided that my interest in trend following was primarily a symptom that my asset allocation was (a) not goal-based and (b) too aggresive. As a result, I dialed back my risk and developed a buy-and-hold IPS I can stick with.

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Re: My trend following strategy and experience

Post by Nate79 » Thu Jan 17, 2019 10:32 pm

Thanks for posting this. It is extremely interesting approach. I'm not sure I have the conviction in the method to try it.

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Re: My trend following strategy and experience

Post by marcopolo » Thu Jan 17, 2019 10:33 pm

willthrill81 wrote:
Thu Jan 17, 2019 7:50 pm

Not really. I favor a hands-on approach, and I've not found a fund that does what I want. Further, even if such a fund existed, I wouldn't be able to use it in my 401k, 457, or HSA.
willthrill81,

Really appreciate your willingness to share your detailed thought process and presenting a transparent view into the implementation.

I am sure it will open you up to many slings and arrows here. But, having read many of your posts, i am sure you are well prepared to handle the criticism. I will follow this going forward to see how it turns out.

I do have a couple of questions, and a comment. More as matter of curiosity, and not as a criticism of your approach.

You say there are not readily available funds that implement a similar strategy, do you have a guess as to why that might be? (tax inefficient? too complex for retail investor to understand? requires too much patience to achieve differentiation?). Or do you think you have discovered something others have not (does not seem like the case given your reference to philosophicaleconomics)?

i think it would be useful to put forward a suitable benchmark against which your approach can be fairly evaluated. How else will you (or your curious onlookers) know whether your method is meeting its goals.
I sure do hope you don't make the argument that it should be its own benchmark :happy

good luck to you, and i do hope it works out for you.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: My trend following strategy and experience

Post by Svensk Anga » Thu Jan 17, 2019 11:06 pm

My impression was that the recent uptick in UER was due more to a surge in new job seekers due to the strong economy rather than accelerating layoffs. The labor force expanding to meet increased demand hardly looks like a harbinger of recession. If so, and especially with a bare 0.01% increase relative to the moving average in a number with significant uncertainty, I would dismiss this as a false signal. I could not see me moving strongly out of stocks based on this. Economists generally consider a 4% UER full employment, so the US lately has been beyond full. Gyrations in the UER so close to 4% look like noise, not signal. That is, in an economy as dynamic as the US, with much creative destruction ongoing, it is rare to get the UER below 4.

You prefer a mechanical rules based system. It seems to me some judgement might be in order. We have so few samples of market history to work with that any rule derived from such has got to be uncertain. So one might want to judge if current conditions are enough different from the historical precedents that some allowances may be called for. I thought the same when there was much angst over the yield curve flattening/maybe inverting. Sure that has often preceded recessions, but how many times has the Fed had to normalize rates after an extended run of ZIRP and QE? Is it not possible, even likely, that in the current environment an inverted curve portends nothing dramatic? What it might portend is increased likelihood of whipsawing trend followers as the markets struggle to sort things out.

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Re: My trend following strategy and experience

Post by unclescrooge » Thu Jan 17, 2019 11:27 pm

willthrill81 wrote:
Thu Jan 17, 2019 7:35 pm
Whipsaws are an inevitability of any trend following strategy, and deep drawdowns are an inevitability of buy-and-hold. Pick your poison.
Well said!

Thanks for sharing your methodology.

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Re: My trend following strategy and experience

Post by willthrill81 » Thu Jan 17, 2019 11:32 pm

ResearchMed wrote:
Thu Jan 17, 2019 8:38 pm
bluquark wrote:
Thu Jan 17, 2019 8:35 pm
It has crossed my mind that a strategy of being 100% stocks on odd-numbered months and 100% bonds on even-numbered months probably has a risk/return profile similar to a 50/50 allocation, modulo the extreme up or down months that come now and then in history. Likewise your strategy probably will have similar returns to a conventional 85/15 allocation.

Assuming you can robotically stick to your plan, it might turn out that the biggest problem with it is tax-inefficiency -- you'll realize all your capital gains every time you go into fixed-income.
I think they've got mostly tax-advantaged (deferred) accounts, so this isn't going to be a huge problem for them.

RM
100% is in tax-advantaged, mostly tax-deferred, but we hope to have 20-25% in Roth by retirement.
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Re: My trend following strategy and experience

Post by willthrill81 » Thu Jan 17, 2019 11:33 pm

dogagility wrote:
Thu Jan 17, 2019 9:17 pm
Interesting. This isn't my approach; however, I appreciate your transparency and will grab my popcorn to follow your thread.

One question: How will you know when your plan is a success and by what metric? (You stated that one year's data is insufficient to gauge success.)
Livesoft asked the same question. I'll probably compare my results to both VTSAX and a combination of 85% VTSAX and 15% VBTLX since that's about the ratio that I expect to be in stocks (85% of the time) over the long-term.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: My trend following strategy and experience

Post by willthrill81 » Thu Jan 17, 2019 11:37 pm

Portfolio7 wrote:
Thu Jan 17, 2019 9:34 pm
willthrill81 wrote:
Thu Jan 17, 2019 7:52 pm
Nowizard wrote:
Thu Jan 17, 2019 7:40 pm
Interesting approach that is "non-boglehead," of course. I like those who are obviously intelligent and thoughtful that take a different approach, own it, but are not critical of those who take different approaches. Let us know how it turns out. Here's hoping you are one of those who do well with your approach that is not the one followed by most folks posting here. If simplicity is ideal, and maximization of returns is the presumed goal, why not consider the Buffett (One or two "t's?) approach?

Tim
Thanks for the kind words. While 'timing the market' is not typical Boglehead strategy, I am 'staying the course' with my strategy. :wink:

I certainly don't think that this type of strategy is appropriate for everyone, but I believe that it will work well enough for me.
I find this very interesting, not just the approach but the way you implement it. I realize that your approach is not about chasing returns, but adjusting the risk profile to match your personality/money attitudes. Firstly, the all-in, all-out approach. I do a TAA overlay, on 6.5 equity classes (the 7th has a half weighting) which have a default allocation of 65% of my portfolio. That allocation can shift between 78% and 52% (but is typically about 70%.) I use a 200 day moving average, but with some additional rules to try to fine tune it. In the course of a year, this portfolio outperformed my base portfolio by about 1%, but like you, I've only been doing this for a year. I'm trying to balance my desire to act with my desire to not fall too far behind when the market does well. I also purposely created a system where missing a signal doesn't hurt me. My work hours are long and unpredictable, so if I'm just buried for a month and I don't shift an equity class a bit, I might take a small hit, but odds are that the damage will be tiny or none, and I can live with it even if I am very late on an adjustment or 3.

I also use the UER, as a 'heightened risk' indicator. I will overweight the minimum volatility fund and stable value fund while that condition exists, and do so more the longer it exists, but I limit how much I can move from equities to fixed income (or vice versa) to 10% in any month. That way I limit my ability to over-react. I examine indicators roughly once per month (I have a frequency limitation of 30 days on my 401k), and have not done so in 2019 yet.

I appreciate your willingness to post your process, and look forward to updates.
Thanks for the info on your process. I was actually a bit late this month making by shift because I just glanced at the UER instead of actually checking out the moving average, when I discovered that the UER crossed its 12 MMA by .01%. I've got reminders set up now to check this the day the BLS releases the data. Henceforth, I'll make whatever trades I need to on that day of the 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 » Thu Jan 17, 2019 11:45 pm

marcopolo wrote:
Thu Jan 17, 2019 10:33 pm
willthrill81 wrote:
Thu Jan 17, 2019 7:50 pm

Not really. I favor a hands-on approach, and I've not found a fund that does what I want. Further, even if such a fund existed, I wouldn't be able to use it in my 401k, 457, or HSA.
willthrill81,

Really appreciate your willingness to share your detailed thought process and presenting a transparent view into the implementation.

I am sure it will open you up to many slings and arrows here. But, having read many of your posts, i am sure you are well prepared to handle the criticism. I will follow this going forward to see how it turns out.
Yes, I know that 'timing the market' is taboo around here, but at the same time, I think that it's good for the forum to not always be an echo chamber. At worst, my experiences will serve as a warning to others to not do the same. :wink:
marcopolo wrote:
Thu Jan 17, 2019 10:33 pm
You say there are not readily available funds that implement a similar strategy, do you have a guess as to why that might be? (tax inefficient? too complex for retail investor to understand? requires too much patience to achieve differentiation?). Or do you think you have discovered something others have not (does not seem like the case given your reference to philosophicaleconomics)?
There are literally an infinite number of ways to engage in trend following, so the likelihood of finding a fund that would implement my desired strategy or even one close to it is slim in the first place.

A hedge fund could implement this in a tax-efficient way. Rather than sell equities, they could use futures contracts to zero their stock position. An individual investor could do this as well in a taxable account, but it's obviously more difficult for them than a fund manager.

You're right that patience is probably the biggest factor. In a way, trend following and factor investing share something in common: there are guaranteed to be times where you underperform the broad market, and this underperformance can go on for a long time. You must have conviction to stick with your strategy before you decide to implement it. This is part of the reason why I don't think that many of the trend following funds have fared well: they tend to lag the market during bull runs, and most investors who are attracted to this kind of strategy aren't patient enough to stick with it. Investors want the benefits of buy-and-hold during the bull runs and the benefits of trend following during the bear markets.
marcopolo wrote:
Thu Jan 17, 2019 10:33 pm
i think it would be useful to put forward a suitable benchmark against which your approach can be fairly evaluated. How else will you (or your curious onlookers) know whether your method is meeting its goals.
I sure do hope you don't make the argument that it should be its own benchmark :happy
As I've noted above, I'll compare it to both VTSAX and a combination of 85% VTSAX and 15% VBTLX. I'll count it as a 'success' if I can beat the latter over the long-term and a 'win' if I can beat the former over the long-term.
marcopolo wrote:
Thu Jan 17, 2019 10:33 pm
good luck to you, and i do hope it works out for you.
Thanks! :beer
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Re: My trend following strategy and experience

Post by willthrill81 » Thu Jan 17, 2019 11:53 pm

Svensk Anga wrote:
Thu Jan 17, 2019 11:06 pm
My impression was that the recent uptick in UER was due more to a surge in new job seekers due to the strong economy rather than accelerating layoffs. The labor force expanding to meet increased demand hardly looks like a harbinger of recession. If so, and especially with a bare 0.01% increase relative to the moving average in a number with significant uncertainty, I would dismiss this as a false signal. I could not see me moving strongly out of stocks based on this. Economists generally consider a 4% UER full employment, so the US lately has been beyond full. Gyrations in the UER so close to 4% look like noise, not signal. That is, in an economy as dynamic as the US, with much creative destruction ongoing, it is rare to get the UER below 4.
That's certainly possible and something I've considered. Yet at the same time, I cannot ignore that the UER has crossed above its 12 MMA before every recession for the last 71 years now. Combined with the moving average of stocks, things have to 'look bad' on paper at least before I move out of stocks.
Svensk Anga wrote:
Thu Jan 17, 2019 11:06 pm
You prefer a mechanical rules based system. It seems to me some judgement might be in order. We have so few samples of market history to work with that any rule derived from such has got to be uncertain. So one might want to judge if current conditions are enough different from the historical precedents that some allowances may be called for. I thought the same when there was much angst over the yield curve flattening/maybe inverting. Sure that has often preceded recessions, but how many times has the Fed had to normalize rates after an extended run of ZIRP and QE? Is it not possible, even likely, that in the current environment an inverted curve portends nothing dramatic? What it might portend is increased likelihood of whipsawing trend followers as the markets struggle to sort things out.
The problem with introducing judgment to the mix is that you then introduce a whole host of human biases that can throw you for a loop. I think that this is one of the reasons that people like Meb Faber have not done well in managing trend following funds. They create a good system, but then they cannot resist the temptation to keep tinkering with everything, and before you know, there's nothing objective at all about what they're doing, and their results show it.

I know full well that we're dealing with limited data, and I know that the economy and the market are far too complex to be able to boil everything down to just two variables and get anything close to 100% accuracy. But I'm confident enough for myself in the strategy to stick with it. As I've noted, it's very long-biased, and I'm unlikely to substantially underperform buy-and-hold.
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Re: My trend following strategy and experience

Post by TheDDC » Fri Jan 18, 2019 12:00 am

Interesting strategy. I don't trust my judgement well enough to do it, though. My question is what is the duration here? Are these retirement assets to be invested over a 20-30 year time frame? Taxable accounts? How do you account for new money? It seems like this would work well using DCA. How are you not realizing huge taxable gains doing this?

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Re: My trend following strategy and experience

Post by willthrill81 » Fri Jan 18, 2019 12:06 am

TheDDC wrote:
Fri Jan 18, 2019 12:00 am
Interesting strategy. I don't trust my judgement well enough to do it, though.
It's simply a matter of following the strategy for me at this point. There's no judgment call for me to make now.
TheDDC wrote:
Fri Jan 18, 2019 12:00 am
My question is what is the duration here? Are these retirement assets to be invested over a 20-30 year time frame?
I don't anticipate retiring for another 17 years. Trend following in general has been shown to be very effective in the withdrawal phase though, and I anticipate continuing to implement it then.
TheDDC wrote:
Fri Jan 18, 2019 12:00 am
How do you account for new money?
I invest it just like the rest of my money. For the performance results, I use the performance calculated by Personal Capital under the 'holdings' tab. Their YouIndex is bologna.
TheDDC wrote:
Fri Jan 18, 2019 12:00 am
How are you not realizing huge taxable gains doing this?
All of my accounts are tax-advantaged. I'm blessed to have more than $75k of tax-advantaged contribution space annually. But as I've noted above, this could be implemented in a tax-efficient way in a taxable account through using futures contracts instead of actually selling your equities.
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Re: My trend following strategy and experience

Post by NoRegret » Fri Jan 18, 2019 1:36 am

willthrill81 wrote:
Thu Jan 17, 2019 7:16 pm
Most of those who have been around here long know that I'm a trend follower. Yes, this means that I time the market, but I use a carefully researched system to do so. It is entirely objective; there is no subjective element as to what I should do (i.e. no feelings or guesses). Yes, there were certainly aspects of subjectivity that went into the creation of this strategy, such as my decision to use a 7 month moving average for part of it (more on that below), but it is now an objective one.

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 know that it would be difficult for me to just do nothing when the news is terrible and stocks are dropping precipitously as they did a decade ago. But I also know that it would be difficult for me to hang on to a significant portion of fixed income investments when things look good and stocks are on a tear. In other words, I do not believe that I am well suited to buy-and-hold. The biggest 'problem' with buy-and-hold is the inevitable drawdowns that have occurred repeatedly throughout history and will undoubtedly occur again in the future; this can be partially mitigated with one's choice of asset class, but this largely mutes returns at the same time. Now the 'problem' with trend following is that it has often trailed stocks during bull markets, and this can go on for a long time. For instance, the widely used 200 day moving average strategy,

After spending countless hours researching trend following, I decided to permanently switch to it in late 2017. The particular system that I use has two elements to it. The first has to do with whether I should be in stocks or fixed income, preferably short-term bonds, stable-value funds, etc. The second has to do with which stock index to invest in when I should be in stocks.

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 (the Philosophical Economist used the 10 month moving average, which is roughly analogous to the widely used 200 day moving average, but I prefer the 7 month moving average as it reacts more quickly to changes in the trend, although I don't expect a significant difference between the two over time as backtesting has shown results to be fairly stable over the long-term from a 3 month moving average out to beyond 1 year). As such, this is a very 'long-biased' system (i.e. it keeps you in stocks more so than most other trend following systems); from 1948 through 2016, it would have remained in stocks about 85% of the time. The UER is used as a recession indicator; for every recession that occurred since 1948, the UER first moved above its 12 month moving average. The average lead time was about 3.5 months, with a range of 0 to 8 months. However, there have been a few times when the UER crossed above the 12 month moving average but no recession occurred. This is where the second part of the strategy, the moving average of the stock indexes, comes in. It serves as what the Philosophical Economist calls a "double confirmation of danger that forces the strategy to take a safe position." The backtested results of this strategy were very good (i.e. better absolute returns, lower drawdowns) but should obviously be viewed with many grains of salt as it is not difficult to craft a strategy that would have performed well with the advantage of hindsight.

So part 1 of the systems tells me when to be in stocks or not. Part 2 tells me which stock indexes to be. That part is very simple: I invest 100% into the stock index that had the highest relative performance over the prior 7 months. This is similar to Gary Antonnaci's dual momentum approach. The number of stock indexes that I have access to is actually fairly limited because all of my investments are in tax-advantaged space, and I don't have many options in my 401k, very few in my 457, and a good number in my HSA, but no limit in my IRA. Consequently, one of my accounts may be in small-cap value while another is in a REIT index, for instance. Since I started using this approach, I've mainly been in large-cap growth.

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.

The primary reason I'm posting all of this is for the sake of those who have asked me to post when I moved out of stocks, as well as to serve as record of the experiment I'm doing. I know that my portfolio is a sort of guinea pig, and I know that the long-term results of my strategy may be poor. But I believe very firmly that this is a strategy that I can stick with, and even if my returns lag those of the market for a long time, I'm willing to do so because I believe that I am likely to have some kind of downside protection while hopefully not at the expense of sacrificing upside potential. I might not achieve this goal, but that's alright. We save approximately 50% of our gross income, and I frankly don't need great returns to become financially independent at a very respectable age. A 4% average real return should result in us being comfortably financially independent by the time I'm 55, and if that must be pushed back, that's fine too.

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.
Good job sticking to your chosen strategy. I’m now in the camp of further fundamental weakness in Q1/Q2. My own model is calling for a re-test of the December low in February and a lower low in June.

Personally I’m long biased and don’t make big changes to my portfolio. I’ve done some de-risking at the edge and am directing current contributions to cash.

Good luck,
NR
Market timer targeting long term cycles -- aiming for several key decisions per asset class per decade

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Re: My trend following strategy and experience

Post by GrowthSeeker » Fri Jan 18, 2019 8:12 am

Thank you for posting this. As a former believer in market timing and recent BH convert, I have some comments.
Some observations about trend following systems in general:
- I think you have to look at more than one parameter, as you have done.
- As a system gets more complicated beyond a certain point, it is less likely to work
- There must be some robustness such that tweaking the parameters up and down a bit still gives similar results. You noted yours works for different numbers of months when calculating the moving averages. That's good.
- Sometimes a binary system can be improved by adding a 3rd or 4th case.
- A winning system works ... until it doesn't
- It is very difficult to stick to a mechanical system when it is working badly because you don't know if you're just in a bad few years or if the underlying conditions have fundamentally changed enough such that your system no longer works. Everyone has their own level of belief in "reversion to the mean". However much faith I personally have in TSM or S&P 500 showing reversion to the mean over time - - I have less faith that your system will show reversion to the mean.
willthrill81 wrote:
Thu Jan 17, 2019 7:53 pm
Considering that historically it would have been in stocks about 85% of the time, if the only thing that mattered was 'time in the market', we could expect it to be roughly equivalent to an 85/15 AA. And if that happens, I'll be satisfied.
I think using this argument to explain the use of an 85/15 AA as a benchmark makes good sense. But there is a big difference between an AA continuously at 85/15 vs a system that is 100% stock or 100% bond divided in time segments of 85/15. Apples vs oranges. I don't think expecting the two to have roughly equivalent outcomes is valid.
Svensk Anga wrote:
Thu Jan 17, 2019 11:06 pm
...
You prefer a mechanical rules based system. It seems to me some judgement might be in order. We have so few samples of market history to work with that any rule derived from such has got to be uncertain. So one might want to judge if current conditions are enough different from the historical precedents that some allowances may be called for.
...
Well the whole point of a system is to take emotions out of it and stick to the rules of the system.
But then the question is, how to deal with the fact that one is making a binary decision when an indicator just barely crosses a barrier? One can slice and dice the past data into different zones (high CAPE vs low CAPE, GDP above or below some value or some moving average). But then the problem is you have more historical periods each with fewer data points.
Another way would be to make it not purely binary: All stocks; All bonds; half of each. But then you have more back testing, and maybe a greater chance of too much curve fitting.
Svensk Anga wrote:
Thu Jan 17, 2019 11:06 pm
We have so few samples of market history to work with that any rule derived from such has got to be uncertain.
This is an excellent point.
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Re: My trend following strategy and experience

Post by bgf » Fri Jan 18, 2019 8:54 am

willthrill81 wrote:
Thu Jan 17, 2019 11:53 pm
I know full well that we're dealing with limited data, and I know that the economy and the market are far too complex to be able to boil everything down to just two variables and get anything close to 100% accuracy. But I'm confident enough for myself in the strategy to stick with it. As I've noted, it's very long-biased, and I'm unlikely to substantially underperform buy-and-hold.
This is really the most interesting part of all this. You and I are similar in that we have a 'world view' on investing that we've developed over time that goes deeper than is necessary for a simple bogleheads strategy. At the end of the day though, I can rely on my 'world view' that I am fundamentally an owner in many businesses. Businesses that own land, buildings, materials, IP, etc. and have talented, motivated, skilled employees working for them. That is my 'world view,' which I've taken from Buffett and Munger. Not all of these companies are 'wonderful businesses,' but that is OK. Some of them are, and over a long period of time, their outperformance will dwarf the so-so performance of all the other so-so companies. We know this intuitively based on a fundamental understanding of how capitalism, competition, and regulation work, and its also supported by the data. I invest globally so I'm part owner of thousands of companies all over the world. If the markets turn sour, and I start asking myself if I should sell. I can ask myself, 'Well, would you rather be just you with some cash in the bank, or would you rather be the part owner of thousands of companies all over the world?" Its always going to be a pretty simple answer.

You are in a far more difficult situation. You are confident right now about using an 'algorithmic' strategy, meaning that its a rule based system requiring no human decision making, but when the going gets tough for you though, how are you so confident that you'll stick with a strategy that's constructed based on a tenuous relationship culled from like <20 recessions? You'll start asking yourself, 'Hey, do I really not want to own all these companies? Do I really just want to be earning 2% on all my money?'

That's a far more difficult question to answer I think.
Last edited by bgf on Fri Jan 18, 2019 9:42 am, edited 1 time in total.
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Re: My trend following strategy and experience

Post by bloom2708 » Fri Jan 18, 2019 9:29 am

Do frequent trading rules interfere with your strategy?

In 401k/Rollover IRA/Roth, you are frequently not allowed to re-buy for 30 days or only allowed so many exchanges.

If your strategy says exchange stocks to bonds and you can't, what happens?
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Re: My trend following strategy and experience

Post by ResearchMed » Fri Jan 18, 2019 9:30 am

bgf wrote:
Fri Jan 18, 2019 8:54 am
willthrill81 wrote:
Thu Jan 17, 2019 11:53 pm
I know full well that we're dealing with limited data, and I know that the economy and the market are far too complex to be able to boil everything down to just two variables and get anything close to 100% accuracy. But I'm confident enough for myself in the strategy to stick with it. As I've noted, it's very long-biased, and I'm unlikely to substantially underperform buy-and-hold.
this is really the most interesting part of all this. you and i are similar in that we have a 'world view' on investing that we've developed over time that goes deeper than is necessary for a simple bogleheads strategy. at the end of the day though, i can rely on my 'world view' that i am fundamentally an owner in many businesses. businesses that own land, buildings, materials, IP, etc. and have talented, motivated, skilled employees working for them. that is my 'world view,' which ive taken from Buffett and Munger. not all of these companies are 'wonderful businesses,' but that is OK. some of them are, and over a long period of time, their outperformance will dwarf the so-so performance of all the other so-so companies. we know this intuitively based on a fundamental understanding of how capitalism, competition, and regulation work, and its also supported by the data. i invest globally so im part owner of thousands of companies all over the world. if the markets turn sour, and i start asking myself if i should sell. i can ask myself, 'well, would you rather be just you with some cash in the bank, or would you rather be the part owner of thousands of companies all over the world?" its always going to be a pretty simple answer.

you are in a far more difficult situation. you are confident right now about using an 'algorithmic' strategy, meaning that its a rule based system requiring no human decision making, but when the going gets tough for you though, how are you so confident that you'll stick with a strategy that's constructed based on a tenuous relationship culled from like <20 recessions? you'll start asking yourself, 'hey, do i really not want to own all these companies? do i really just want to be earning 2% on all my money?'

that's a far more difficult question to answer i think.
Sorry... DNR.

I'm VERY interested in this topic, but it's far too difficult to read your post with no upper case to start sentences, especially when there is no double spacing between sentences. And it is too hard to search for differences between periods and commas on what is already smallish font on computer screen, which isn't as crisp as "black ink on white paper" text...
(Missing apostrophes doesn't help.)

I'm sure the style must be very trendy.

RM
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Re: My trend following strategy and experience

Post by staythecourse » Fri Jan 18, 2019 9:42 am

This is funny. I thought of this same idea the first year I EVER started thinking about personal finance. I thought, "what if you used unemployment numbers and the direction the market was going to decide how much you should be in or out of the market". I am not that bright so thought if I thought of it as a some random investor that means it has already by thought of and tried AT LEAST 10 years prior. So I never even thought of trying it.

That is the problem with all market timing strategies. If the info. is so readily available then why isn't it used by guys with ivy league degrees AND computers and data more precise then you or I have access to AND the technology to make those trades nanoseconds before your trades?

Do I believe in market timing? Yes. Do I believe there is some system that has shows PROSPECTIVELY to improve returns? No. It doesn't pass the sniff test of common sense. With BILLIONS/ TRILLIONS of dollars at stake every possible algorithm has already been thought. I said the same thing when Mebane Farber was all the craze and his GTAA was so bad he managed to erase and internet footprint it ever exists. Now that is impressive.

The market timing that works seems more based on luck then skill. Just like manager luck, i.e. a superstar manager in the late 90's because he have always been a large cap guy

Good luck.
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Re: My trend following strategy and experience

Post by bgf » Fri Jan 18, 2019 9:43 am

ResearchMed wrote:
Fri Jan 18, 2019 9:30 am

Sorry... DNR.
FTFY
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Re: My trend following strategy and experience

Post by ResearchMed » Fri Jan 18, 2019 9:46 am

bgf wrote:
Fri Jan 18, 2019 9:43 am
ResearchMed wrote:
Fri Jan 18, 2019 9:30 am

Sorry... DNR.
FTFY
Many thanks; much appreciated!

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Re: My trend following strategy and experience

Post by willthrill81 » Fri Jan 18, 2019 10:57 am

bgf wrote:
Fri Jan 18, 2019 8:54 am
willthrill81 wrote:
Thu Jan 17, 2019 11:53 pm
I know full well that we're dealing with limited data, and I know that the economy and the market are far too complex to be able to boil everything down to just two variables and get anything close to 100% accuracy. But I'm confident enough for myself in the strategy to stick with it. As I've noted, it's very long-biased, and I'm unlikely to substantially underperform buy-and-hold.
This is really the most interesting part of all this. You and I are similar in that we have a 'world view' on investing that we've developed over time that goes deeper than is necessary for a simple bogleheads strategy. At the end of the day though, I can rely on my 'world view' that I am fundamentally an owner in many businesses. Businesses that own land, buildings, materials, IP, etc. and have talented, motivated, skilled employees working for them. That is my 'world view,' which I've taken from Buffett and Munger. Not all of these companies are 'wonderful businesses,' but that is OK. Some of them are, and over a long period of time, their outperformance will dwarf the so-so performance of all the other so-so companies. We know this intuitively based on a fundamental understanding of how capitalism, competition, and regulation work, and its also supported by the data. I invest globally so I'm part owner of thousands of companies all over the world. If the markets turn sour, and I start asking myself if I should sell. I can ask myself, 'Well, would you rather be just you with some cash in the bank, or would you rather be the part owner of thousands of companies all over the world?" Its always going to be a pretty simple answer.

You are in a far more difficult situation. You are confident right now about using an 'algorithmic' strategy, meaning that its a rule based system requiring no human decision making, but when the going gets tough for you though, how are you so confident that you'll stick with a strategy that's constructed based on a tenuous relationship culled from like <20 recessions? You'll start asking yourself, 'Hey, do I really not want to own all these companies? Do I really just want to be earning 2% on all my money?'

That's a far more difficult question to answer I think.
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.

My decision was based in part by asking myself whether I could really stick with buy-and-hold in a market meltdown situation. Stocks fell by 50% a little over a decade ago, and even some of the most prominent folks here were second-guessing themselves at that time. The answer to just balance that out with an adequate allocation to fixed income doesn't really satisfy me either though, because I know that bonds took a big hit in real dollars from 1977-1981, and stocks didn't balance things out too well then either; the 1940s were very rough on fixed income too. What if bonds and stocks declined significantly simultaneously? Could I buy-and-hold through that? What if Great Depression Part 2 hit? Could I sit tight through a 90% market decline? I genuinely do not believe that I could, and I have my doubts as to how many here could. And since all of these things have happened, it is proof that they are possible and could happen again, however unlikely that may be.

I know enough about the history of the markets to make skittish enough to want some kind of downside protection, but as Bogle said, "invest we must." So here I am.
“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 10:59 am

bloom2708 wrote:
Fri Jan 18, 2019 9:29 am
Do frequent trading rules interfere with your strategy?

In 401k/Rollover IRA/Roth, you are frequently not allowed to re-buy for 30 days or only allowed so many exchanges.

If your strategy says exchange stocks to bonds and you can't, what happens?
I could trade literally every day in my 401k, 457, and HSA. The only restriction I could run into is with Vanguard's frequent trading policy, but that limits you for only one month, and I don't trade more often than that. And even if I needed to, there's always an acceptable fund to buy back into.
“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 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?
If you torture the data long enough, it will confess to anything. ~Ronald Coase

foo.c
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Re: My trend following strategy and experience

Post by foo.c » Fri Jan 18, 2019 11:08 am

The UER is actually 0.1% below the 12 month MA. That difference makes such a huge change in your position.

I do something similar to what you do but I am more reactive and more gradual at the same time.

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2pedals
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Re: My trend following strategy and experience

Post by 2pedals » 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.

bgf
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Re: My trend following strategy and experience

Post by bgf » 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?
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

garlandwhizzer
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Re: My trend following strategy and experience

Post by garlandwhizzer » Fri Jan 18, 2019 12:23 pm

No one knows the future but I suspect that this trend following strategy will likely do what it is primarily intended to do, reduce downside losses in bear markets. I also suspect that long term it is likely to underperform a standard buy and hold balanced portfolio. Willthrill81 is willing to accept this possible tradeoff in return for downside protection. Presumably the market rewards investors for taking on risk (bonds versus stocks for example). If that is true any systematic and significant periodic decrease in the risk of a portfolio is expected to reduce long term returns. Of course there's the issue with the Low Vol factor, in which the market rewards less volatile stocks long term, but that's not the same thing as switching assets from stocks to safer assets in times of market declines. A trend following strategy is not my cup of tea, but for willthrill81 who has a different risk tolerance and different financial goals it may be a great fit. It will be interesting to see how it works out long term.

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Global100
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Re: My trend following strategy and experience

Post by Global100 » Fri Jan 18, 2019 12:24 pm

Checking this strategy and the data for the bear market a decade ago: when would the numbers have indicated to sell out of U.S. stocks and when would they have indicated to buy them back?

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

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Last edited by Global100 on Fri Jan 18, 2019 2:06 pm, edited 1 time in total.

sixtyforty
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Re: My trend following strategy and experience

Post by sixtyforty » 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 ?
"Simplicity is the ultimate sophistication" - Leonardo Da Vinci

mrussell22
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Re: My trend following strategy and experience

Post by mrussell22 » Fri Jan 18, 2019 12:49 pm

Interesting, keep us posted and Good Luck...

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