My trend following strategy and experience

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willthrill81
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Re: My trend following strategy and experience

Post by willthrill81 » Sat Jan 19, 2019 2:56 pm

james22 wrote:
Sat Jan 19, 2019 2:40 pm
Interesting, but I'd always fear "it's different this time."
That's what even some of the most diehard BHs were wondering about during the financial crisis. And it very well could have been. Buy-and-hold is certainly not the and only answer to this fear.
“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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Forester
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Re: My trend following strategy and experience

Post by Forester » Sat Jan 19, 2019 3:05 pm

I think this period will turn out to be a whipsaw event :annoyed

Having looked at the performance of trend following since 2009, it has underperformed a 70% US stocks 30% bonds split (approx 10% vs 7%). There has been no opportunity for trend models to benefit from non-US stocks being in a lengthy uptrend. Total return, non-US stocks are approximately flat over the last 11 years.

What I have settled on is a 30% allocation to trend following. This means that 70% of my money is buy-and-hold and “safe” from me making large changes based on a simple signal.

12.5% US large cap
12.5% US small cap
12.5% UK FTSE 250
12.5% Emerging markets

20% intermediate term bonds

30% trend following using 12-month lookback. Strongest of (1) US stocks (2) non-US stocks (3) bonds.

If trend goes “risk off” you are then 50% in bonds. A permanent 20% allocation to bonds is hardly over-cautious. If US stocks or non-US stocks are on a run, the 30% trend portion bolsters the existing buy-and-hold segment.

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Re: My trend following strategy and experience

Post by willthrill81 » Sat Jan 19, 2019 3:27 pm

Forester wrote:
Sat Jan 19, 2019 3:05 pm
I think this period will turn out to be a whipsaw event :annoyed

Having looked at the performance of trend following since 2009, it has underperformed a 70% US stocks 30% bonds split (approx 10% vs 7%).
You can't paint with quite that broad of a brush. The system that I follow did not call to move out of stocks from 2009 until the current month, so it's performance was equal to buy-and-hold's over that period.

What you're describing is the general performance of trend following strategies based purely on price (e.g. 200 day moving average). And yes, that's been a common occurrence: such strategies trail the market during bull markets but do better during bear markets. For instance, a simple version of the 200 DMA strategy (stocks and cash as out of market asset) has lagged the market by a little over 1% annually since 2010, but if you include 2007-2009, then it outperformed the market by about 2% over the whole period.

I strongly considered using a 10 MMA (nearly equivalent to a 200 DMA but far simpler to implement), but I prefer that my chosen strategy has historically been whipsawed far less. It will probably lead to deeper drawdowns than a price-only strategy, but that's a trade-off I'm willing to make.
Last edited by willthrill81 on Sat Jan 19, 2019 3:44 pm, edited 1 time in total.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: My trend following strategy and experience

Post by bgf » Sat Jan 19, 2019 3:36 pm

willthrill81 wrote:
Sat Jan 19, 2019 3:27 pm
Forester wrote:
Sat Jan 19, 2019 3:05 pm
I think this period will turn out to be a whipsaw event :annoyed

Having looked at the performance of trend following since 2009, it has underperformed a 70% US stocks 30% bonds split (approx 10% vs 7%).
You can't paint with quite that broad of a brush. The system that I follow did call to move out of stocks from 2009 until the current month, so it's performance was equal to buy-and-hold's over that period.
when you backtest do you account for monthly contributions? for example, i can't get an accurate picture of how my portfolio would have behaved going back to 2009 by simply looking at the total return fund performance over that date because my contributions would have been lopsided between international and US (and of varying amounts as well) during that period. for months in a row I might have contributed only to international, with fewer contributions to US over the period.

this would affect the comparison wouldn't it?

same with a US/bond portfolio.
Last edited by bgf on Sat Jan 19, 2019 3:39 pm, edited 1 time in total.
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Re: My trend following strategy and experience

Post by willthrill81 » Sat Jan 19, 2019 3:39 pm

bgf wrote:
Sat Jan 19, 2019 3:36 pm
willthrill81 wrote:
Sat Jan 19, 2019 3:27 pm
Forester wrote:
Sat Jan 19, 2019 3:05 pm
I think this period will turn out to be a whipsaw event :annoyed

Having looked at the performance of trend following since 2009, it has underperformed a 70% US stocks 30% bonds split (approx 10% vs 7%).
You can't paint with quite that broad of a brush. The system that I follow did call to move out of stocks from 2009 until the current month, so it's performance was equal to buy-and-hold's over that period.
when you backtest do you account for monthly contributions? for example, i can't get an accurate picture of how my portfolio would have behaved going back to 2009 by simply looking at the total return fund performance over that date because my contributions would have been lopsided between international and US during that period. for months in a row I might have contributed only to international, with fewer contributions to US over the period.

this would affect the comparison wouldn't it?

same with a US/bond portfolio.
It's very cumbersome to examine dollar-weighted returns (i.e. account for monthly contributions) instead of time-weighted returns in a backtest. Some here are adept at programming and can do it, but that's a skill that I don't possess. I'd have to do it manually, which would take a long time.

It sounds like you were were rebalancing with contributions rather than the traditional way (i.e. selling the 'higher' asset to buy the 'lower' one). My guess is that you would have done so because you didn't want capital gains tax in a taxable account, but perhaps there's another reason.
“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 Forester » Sat Jan 19, 2019 3:41 pm

Also; strategies like Antonacci’s GEM (which I use) have suffered false signals into non-US stocks.

You are correct that a straightforward 200 day MA strategy just on the S&P 500 has fared OK.

I hope that we soon get the mean reversion in non-US stocks. More intelligent people than myself think this is related to factors such as debt levels or the strength of the US dollar. In hindsight, non-US stocks in the mid-2000s feel about as over-stretched as US stocks today. If US stocks stall and disappoint, perhaps there will be gathering pace of money into non-US assets.

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Re: My trend following strategy and experience

Post by willthrill81 » Sat Jan 19, 2019 3:45 pm

Forester wrote:
Sat Jan 19, 2019 3:41 pm
Also; strategies like Antonacci’s GEM (which I use) have suffered false signals into non-US stocks.

You are correct that a straightforward 200 day MA strategy just on the S&P 500 has fared OK.

I hope that we soon get the mean reversion in non-US stocks. More intelligent people than myself think this is related to factors such as debt levels or the strength of the US dollar. In hindsight, non-US stocks in the mid-2000s feel about as over-stretched as US stocks today. If US stocks stall and disappoint, perhaps there will be gathering pace of money into non-US assets.
I'm not sure. But I am glad that I can be completely ambivalent now with regard to the U.S./ex-U.S. issue. When my system calls me for to be in equities, I'll be in whichever index has had the highest relative performance over the prior 7 months.
“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 bgf » Sat Jan 19, 2019 3:46 pm

willthrill81 wrote:
Sat Jan 19, 2019 3:39 pm
bgf wrote:
Sat Jan 19, 2019 3:36 pm
willthrill81 wrote:
Sat Jan 19, 2019 3:27 pm
Forester wrote:
Sat Jan 19, 2019 3:05 pm
I think this period will turn out to be a whipsaw event :annoyed

Having looked at the performance of trend following since 2009, it has underperformed a 70% US stocks 30% bonds split (approx 10% vs 7%).
You can't paint with quite that broad of a brush. The system that I follow did call to move out of stocks from 2009 until the current month, so it's performance was equal to buy-and-hold's over that period.
when you backtest do you account for monthly contributions? for example, i can't get an accurate picture of how my portfolio would have behaved going back to 2009 by simply looking at the total return fund performance over that date because my contributions would have been lopsided between international and US during that period. for months in a row I might have contributed only to international, with fewer contributions to US over the period.

this would affect the comparison wouldn't it?

same with a US/bond portfolio.
It's very cumbersome to examine dollar-weighted returns (i.e. account for monthly contributions) instead of time-weighted returns in a backtest. Some here are adept at programming and can do it, but that's a skill that I don't possess. I'd have to do it manually, which would take a long time.

It sounds like you were were rebalancing with contributions rather than the traditional way (i.e. selling the 'higher' asset to buy the 'lower' one). My guess is that you would have done so because you didn't want capital gains tax in a taxable account, but perhaps there's another reason.
that is what i figured. the only practical way i've found to actually benchmark is to create a benchmark portfolio that mirrors all transactions. i now track dollar weighted and time weighted returns in real time, and i can imagine it being a huge hassle to do so by backtesting... yuck.
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Re: My trend following strategy and experience

Post by oriol » Thu Jan 31, 2019 6:39 pm

willthrill81, I too can't stand the wild B&H drawdowns and am thrilled to see how your market timing effort pans out - thanks for starting this thread! Hoping you'll keep posting the entries/exits dictated by your strategy and its relative performance from time to time so that the rest of us can keep track of it.
BlueEars wrote:
Sat Jan 19, 2019 10:51 am
After reading that Philosophical Investor article I added the unemployment rate as one component to my spreadsheet. It is a small factor (equivalent to a very high PE10 factor) with the largest factor in my approach being the yield curve. Anyway, I look for 3 continuous months of unemployment above the 12 month moving average before calling this factor a negative. My backtest with modern Fed data goes back to the 1950's. Just thought I'd mention this for your future consideration.
I dig the multifactor approach. Do you mind listing the other components that you're using, besides UNRATE, PE10 and the yield curve? Also, bearing in mind that you wait 3 months for UNRATE to show you the red flag, just how negative of a yield curve (and by the way, are we talking 10Y2Y or 5Y3M?) is required for you to call it a negative?

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Re: My trend following strategy and experience

Post by BlueEars » Fri Feb 01, 2019 11:45 am

oriol wrote:
Thu Jan 31, 2019 6:39 pm
...
BlueEars wrote:
Sat Jan 19, 2019 10:51 am
After reading that Philosophical Investor article I added the unemployment rate as one component to my spreadsheet. It is a small factor (equivalent to a very high PE10 factor) with the largest factor in my approach being the yield curve. Anyway, I look for 3 continuous months of unemployment above the 12 month moving average before calling this factor a negative. My backtest with modern Fed data goes back to the 1950's. Just thought I'd mention this for your future consideration.
I dig the multifactor approach. Do you mind listing the other components that you're using, besides UNRATE, PE10 and the yield curve? Also, bearing in mind that you wait 3 months for UNRATE to show you the red flag, just how negative of a yield curve (and by the way, are we talking 10Y2Y or 5Y3M?) is required for you to call it a negative?
I'm mindful that this is Willthrill's thread. I'd rather not go into details of my approach and would encourage others to do research. Regarding the yield curve I don't think it is too useful until it is fully inverted. I use the 10Y minus 3mo difference. You will note in the Fed Leading Index they use this too: https://fred.stlouisfed.org/series/USSLIND By click on the little "+ more" on that Fed chart page and then the "View All", you will see an explanation of the index. Some years ago there was a Fed paper showing the correlation of the yield curve to eventual stock market declines. I say "eventual" because it alone is not a great timing mechanism.

BTW, that Fed leading index series is normally updated early each month. I think because of the shutdown it is tardy.

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Re: My trend following strategy and experience

Post by nps » Fri Feb 01, 2019 7:58 pm

Did you get back into stocks? Is emerging markets one of the indices you track?

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Re: My trend following strategy and experience

Post by willthrill81 » Fri Feb 01, 2019 8:04 pm

nps wrote:
Fri Feb 01, 2019 7:58 pm
Did you get back into stocks? Is emerging markets one of the indices you track?
No, I'm still out of stocks. The UER increased to 4.0%, which is still above its 12 MMA of 3.88%, and all of my available stock funds are also below their 7 MMA.

Yes, VEIEX is one of the funds that I track.

While I am definitely a 'pro-stock' investor, the stability of my current investments, mostly short-term Treasuries and TIAA Real Estate, is a bit refreshing.
Last edited by willthrill81 on Fri Feb 01, 2019 8:09 pm, edited 1 time in total.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: My trend following strategy and experience

Post by willthrill81 » Fri Feb 01, 2019 8:08 pm

oriol wrote:
Thu Jan 31, 2019 6:39 pm
willthrill81, I too can't stand the wild B&H drawdowns and am thrilled to see how your market timing effort pans out - thanks for starting this thread! Hoping you'll keep posting the entries/exits dictated by your strategy and its relative performance from time to time so that the rest of us can keep track of it.
You're welcome! If nothing else, this thread keeps the forum from being an echo chamber.

I'll post every time I move in/out of the market.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: My trend following strategy and experience

Post by nps » Fri Feb 01, 2019 8:43 pm

willthrill81 wrote:
Fri Feb 01, 2019 8:04 pm
nps wrote:
Fri Feb 01, 2019 7:58 pm
Did you get back into stocks? Is emerging markets one of the indices you track?
No, I'm still out of stocks. The UER increased to 4.0%, which is still above its 12 MMA of 3.88%, and all of my available stock funds are also below their 7 MMA.

Yes, VEIEX is one of the funds that I track.

While I am definitely a 'pro-stock' investor, the stability of my current investments, mostly short-term Treasuries and TIAA Real Estate, is a bit refreshing.
Just to clarify, are you averaging the end of month VEIEX prices for Jul 2018 - Jan 2019 and comparing to the Jan 31/Feb 1 closing price?

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Re: My trend following strategy and experience

Post by willthrill81 » Fri Feb 01, 2019 9:07 pm

nps wrote:
Fri Feb 01, 2019 8:43 pm
willthrill81 wrote:
Fri Feb 01, 2019 8:04 pm
nps wrote:
Fri Feb 01, 2019 7:58 pm
Did you get back into stocks? Is emerging markets one of the indices you track?
No, I'm still out of stocks. The UER increased to 4.0%, which is still above its 12 MMA of 3.88%, and all of my available stock funds are also below their 7 MMA.

Yes, VEIEX is one of the funds that I track.

While I am definitely a 'pro-stock' investor, the stability of my current investments, mostly short-term Treasuries and TIAA Real Estate, is a bit refreshing.
Just to clarify, are you averaging the end of month VEIEX prices for Jul 2018 - Jan 2019 and comparing to the Jan 31/Feb 1 closing price?
I use Portfolio Visualizer to do my calculations, and it uses the price of the last trading day of each 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 BlueEars » Fri Feb 01, 2019 11:02 pm

Willthrill, in your first post you mentioned that the 12 month average UER was 3.88%. Are you using the UNRATE series https://fred.stlouisfed.org/data/UNRATE.txt ? If so the 12 month average is exactly 3.90 from my calculations (using the Jan to Dec 2018 monthly data). That would be exactly the same as the December number. In other words not above the moving average on that month but equal to it. So if I understand this correctly this would be applied to the December 31st action for all of January. And you would stay in the market since the UER is not above the 12 month average (but exactly at it). That is, unless you are using a >= rule in which case you are right to be out of the market in January.

But it would be above the moving average in January (at 4.0) which would then trigger an exit in February if your indexes are below their 7mo avg. I may not be doing this right though so apologies if I got it wrong.

Also if the UER were to stay above it's 12 month average but the indexes turn up above theirs, I am guessing you move back to fully invested. Is this right?

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Re: My trend following strategy and experience

Post by nps » Sat Feb 02, 2019 7:13 am

willthrill81 wrote:
Fri Feb 01, 2019 9:07 pm
nps wrote:
Fri Feb 01, 2019 8:43 pm
willthrill81 wrote:
Fri Feb 01, 2019 8:04 pm
nps wrote:
Fri Feb 01, 2019 7:58 pm
Did you get back into stocks? Is emerging markets one of the indices you track?
No, I'm still out of stocks. The UER increased to 4.0%, which is still above its 12 MMA of 3.88%, and all of my available stock funds are also below their 7 MMA.

Yes, VEIEX is one of the funds that I track.

While I am definitely a 'pro-stock' investor, the stability of my current investments, mostly short-term Treasuries and TIAA Real Estate, is a bit refreshing.
Just to clarify, are you averaging the end of month VEIEX prices for Jul 2018 - Jan 2019 and comparing to the Jan 31/Feb 1 closing price?
I use Portfolio Visualizer to do my calculations, and it uses the price of the last trading day of each month.
I wonder what I'm not seeing then. The end of month price history of VEIEX on Vanguard's website is:

07/31/2018 $27.61
08/31/2018 $26.63
09/28/2018 $25.99
10/31/2018 $24.02
11/30/2018 $25.09
12/31/2018 $24.19
01/31/2019 $26.25

The average is $25.68 which is less than the price on 1/31/2019, so the index fund appears to be above its 7 month moving average.

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Re: My trend following strategy and experience

Post by willthrill81 » Sat Feb 02, 2019 8:28 am

BlueEars wrote:
Fri Feb 01, 2019 11:02 pm
Willthrill, in your first post you mentioned that the 12 month average UER was 3.88%. Are you using the UNRATE series https://fred.stlouisfed.org/data/UNRATE.txt ?
I use the BLS data from the site below.

https://data.bls.gov/timeseries/lns14000000
BlueEars wrote:
Fri Feb 01, 2019 11:02 pm
Also if the UER were to stay above it's 12 month average but the indexes turn up above theirs, I am guessing you move back to fully invested. Is this right?
That's right. I only move/stay out of stocks if both the UER is above its 12 MMA and the indexes are below their 7 MMA.
“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 » Sat Feb 02, 2019 8:30 am

nps wrote:
Sat Feb 02, 2019 7:13 am
willthrill81 wrote:
Fri Feb 01, 2019 9:07 pm
nps wrote:
Fri Feb 01, 2019 8:43 pm
willthrill81 wrote:
Fri Feb 01, 2019 8:04 pm
nps wrote:
Fri Feb 01, 2019 7:58 pm
Did you get back into stocks? Is emerging markets one of the indices you track?
No, I'm still out of stocks. The UER increased to 4.0%, which is still above its 12 MMA of 3.88%, and all of my available stock funds are also below their 7 MMA.

Yes, VEIEX is one of the funds that I track.

While I am definitely a 'pro-stock' investor, the stability of my current investments, mostly short-term Treasuries and TIAA Real Estate, is a bit refreshing.
Just to clarify, are you averaging the end of month VEIEX prices for Jul 2018 - Jan 2019 and comparing to the Jan 31/Feb 1 closing price?
I use Portfolio Visualizer to do my calculations, and it uses the price of the last trading day of each month.
I wonder what I'm not seeing then. The end of month price history of VEIEX on Vanguard's website is:

07/31/2018 $27.61
08/31/2018 $26.63
09/28/2018 $25.99
10/31/2018 $24.02
11/30/2018 $25.09
12/31/2018 $24.19
01/31/2019 $26.25

The average is $25.68 which is less than the price on 1/31/2019, so the index fund appears to be above its 7 month moving average.
I'm not exactly sure where the discrepancy is, but I'm not concerned about it. It's probably because the total bond market fund has had higher relative strength than VEIEX, so I'm in the former.
“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

nps
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Re: My trend following strategy and experience

Post by nps » Sat Feb 02, 2019 9:17 am

willthrill81 wrote:
Sat Feb 02, 2019 8:30 am
nps wrote:
Sat Feb 02, 2019 7:13 am
willthrill81 wrote:
Fri Feb 01, 2019 9:07 pm
nps wrote:
Fri Feb 01, 2019 8:43 pm
willthrill81 wrote:
Fri Feb 01, 2019 8:04 pm


No, I'm still out of stocks. The UER increased to 4.0%, which is still above its 12 MMA of 3.88%, and all of my available stock funds are also below their 7 MMA.

Yes, VEIEX is one of the funds that I track.

While I am definitely a 'pro-stock' investor, the stability of my current investments, mostly short-term Treasuries and TIAA Real Estate, is a bit refreshing.
Just to clarify, are you averaging the end of month VEIEX prices for Jul 2018 - Jan 2019 and comparing to the Jan 31/Feb 1 closing price?
I use Portfolio Visualizer to do my calculations, and it uses the price of the last trading day of each month.
I wonder what I'm not seeing then. The end of month price history of VEIEX on Vanguard's website is:

07/31/2018 $27.61
08/31/2018 $26.63
09/28/2018 $25.99
10/31/2018 $24.02
11/30/2018 $25.09
12/31/2018 $24.19
01/31/2019 $26.25

The average is $25.68 which is less than the price on 1/31/2019, so the index fund appears to be above its 7 month moving average.
I'm not exactly sure where the discrepancy is, but I'm not concerned about it. It's probably because the total bond market fund has had higher relative strength than VEIEX, so I'm in the former.
I don't understand that. Your rule was stated as "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." You are now saying you consider a bond fund to be a stock index?

Also, what do you mean by relative strength? VEIEX is 2.2 percent above its 7MMA, while VBFMX (Vanguard Total Bond Market Index Fund) is only 1.3 percent over its 7MMA.

Your approach is rules-based to the point of keeping or selling all of your stocks based on the impact of a change as small as one-hundredth of one percent in the unemployment rate, so it's hard to understand why you seem to be more cavalier about other rules such as what constitutes a stock fund or whether a stock fund that's moved 2.2 percent beyond a trigger point that you defined yourself should cause you to act.

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Re: My trend following strategy and experience

Post by BlueEars » Sat Feb 02, 2019 9:33 am

Perhaps a quibble but when I use the fund data I include distributions. For example, for VEIEX there were distributions in Sept and Dec 2018.

There is always going to be a certain amount of uncertainty in the numbers. One is trying to define the sell/buy rules precisely. But then could the unemployment rate for a past month might be restated by the government? I think this might happen.

I guess the point is to precisely define the method and live with the minor uncertainty.

nps
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Re: My trend following strategy and experience

Post by nps » Sat Feb 02, 2019 9:48 am

BlueEars wrote:
Sat Feb 02, 2019 9:33 am
Perhaps a quibble but when I use the fund data I include distributions. For example, for VEIEX there were distributions in Sept and Dec 2018.

There is always going to be a certain amount of uncertainty in the numbers. One is trying to define the sell/buy rules precisely. But then could the unemployment rate for a past month might be restated by the government? I think this might happen.

I guess the point is to precisely define the method and live with the minor uncertainty.
That's why I clarified with the OP above. He stated that he uses the price of the last trading day of each month.

Also, without those distributions the current price would be even higher, and that effect accumulates over time.

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Re: My trend following strategy and experience

Post by willthrill81 » Sat Feb 02, 2019 1:27 pm

nps wrote:
Sat Feb 02, 2019 9:17 am
willthrill81 wrote:
Sat Feb 02, 2019 8:30 am
nps wrote:
Sat Feb 02, 2019 7:13 am
willthrill81 wrote:
Fri Feb 01, 2019 9:07 pm
nps wrote:
Fri Feb 01, 2019 8:43 pm


Just to clarify, are you averaging the end of month VEIEX prices for Jul 2018 - Jan 2019 and comparing to the Jan 31/Feb 1 closing price?
I use Portfolio Visualizer to do my calculations, and it uses the price of the last trading day of each month.
I wonder what I'm not seeing then. The end of month price history of VEIEX on Vanguard's website is:

07/31/2018 $27.61
08/31/2018 $26.63
09/28/2018 $25.99
10/31/2018 $24.02
11/30/2018 $25.09
12/31/2018 $24.19
01/31/2019 $26.25

The average is $25.68 which is less than the price on 1/31/2019, so the index fund appears to be above its 7 month moving average.
I'm not exactly sure where the discrepancy is, but I'm not concerned about it. It's probably because the total bond market fund has had higher relative strength than VEIEX, so I'm in the former.
I don't understand that. Your rule was stated as "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." You are now saying you consider a bond fund to be a stock index?

Also, what do you mean by relative strength? VEIEX is 2.2 percent above its 7MMA, while VBFMX (Vanguard Total Bond Market Index Fund) is only 1.3 percent over its 7MMA.

Your approach is rules-based to the point of keeping or selling all of your stocks based on the impact of a change as small as one-hundredth of one percent in the unemployment rate, so it's hard to understand why you seem to be more cavalier about other rules such as what constitutes a stock fund or whether a stock fund that's moved 2.2 percent beyond a trigger point that you defined yourself should cause you to act.
I didn't specify it in the OP, but if VBMFX has had higher relative strength (as measured by PV, the tool I'm using rather than calculating all of this manually; consult it if you want more details on the specifics) than all of my available stock indices (in addition, of course, to the UER being above its 12 MMA), I will move into fixed income.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: My trend following strategy and experience

Post by BlueEars » Sun Feb 03, 2019 11:54 am

I was thinking about this UER calculation and setting the limit. The unemployment numbers are reported to only 1 digit after the decimal place. So here is an extreme example that illustrates a potential rounding problem. Note I am guessing at the BLS rounding technique

case 1) 12 months with 4.050% unemployment reported as 4.1% for each month
case 2) 12 months with 4.149% unemployment reported as 4.1% for each month
Now suppose we have the next month come in at 4.151% unemployment which is reported as 4.2% unemployment.

Then in case 1 we have the unemployment increasing by 0.101% above it's 12 MMA. But in case 2 we have unemployment increasing by only 0.002%.I suppose you could argue the unemployment did increase in each of these but I'm not sure about triggering a sell on such a small increase as in case 2. I admit this is kind of a fine point.


P.S. I made a mistake in my previous post and indeed the 12 MMA was as you calculated Willthrill.

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Re: My trend following strategy and experience

Post by Forester » Sun Feb 03, 2019 3:05 pm

Are people using a risk free yardstick for moving average lookbacks? Wouldn't an inflationary environment give a false impression of good performance?

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Re: My trend following strategy and experience

Post by willthrill81 » Sun Feb 03, 2019 5:04 pm

BlueEars wrote:
Sun Feb 03, 2019 11:54 am
I was thinking about this UER calculation and setting the limit. The unemployment numbers are reported to only 1 digit after the decimal place. So here is an extreme example that illustrates a potential rounding problem. Note I am guessing at the BLS rounding technique

case 1) 12 months with 4.050% unemployment reported as 4.1% for each month
case 2) 12 months with 4.149% unemployment reported as 4.1% for each month
Now suppose we have the next month come in at 4.151% unemployment which is reported as 4.2% unemployment.

Then in case 1 we have the unemployment increasing by 0.101% above it's 12 MMA. But in case 2 we have unemployment increasing by only 0.002%.I suppose you could argue the unemployment did increase in each of these but I'm not sure about triggering a sell on such a small increase as in case 2. I admit this is kind of a fine point.
Over the long-term, rounding errors are unlikely to have a significant impact on the results. There's nothing special about 12 months. 11 or 13 months, over the long-term, seem likely to have very similar results.
BlueEars wrote:
Sun Feb 03, 2019 11:54 am
P.S. I made a mistake in my previous post and indeed the 12 MMA was as you calculated Willthrill.
No problem. Thanks for acknowledging that. :beer
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Re: My trend following strategy and experience

Post by BlueEars » Sun Feb 03, 2019 5:24 pm

If it were me I'd want a margin to avoid noisy data causing unnecessary switches. One unnecessary switch can be quite costly. I don't have any great ideas for how to get at the amount of noise in the data. Clearly BLS surveys of unemployment are a statistical procedure and have some +- error.

I'm retired and probably have a different view of "the long term" then you. :happy

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Re: My trend following strategy and experience

Post by siamond » Sun Feb 03, 2019 6:42 pm

I am very wary about trend following, but I don't have a good solid reason for it (data driven or else), to be honest, just a gut feeling. In any case, I applaud Will's eagerness to be fully transparent as things unfold. This will be quite fascinating to follow. Good luck!

PS. I agree with the previous poster that some kind of hysteresis mechanism would seem in order for such whipsaw-happy strategy...

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Re: My trend following strategy and experience

Post by willthrill81 » Sun Feb 03, 2019 6:54 pm

BlueEars wrote:
Sun Feb 03, 2019 5:24 pm
If it were me I'd want a margin to avoid noisy data causing unnecessary switches. One unnecessary switch can be quite costly. I don't have any great ideas for how to get at the amount of noise in the data. Clearly BLS surveys of unemployment are a statistical procedure and have some +- error.

I'm retired and probably have a different view of "the long term" then you. :happy
Those who are very concerned about whipsaws should probably steer clear of trend following. Even with the multiple signals my system requires for me to be out of stocks, which significantly reduces the opportunity for whipsaws compared to a price-only strategy like the 200 DMA, whipsaws will occur. That's just part of the price to be paid for the strategy. Part of buy-and-hold's price is deep drawdowns. Pick your poison.

Unless you're comfortable with introducing subjectivity to the mix, which I'm not, introducing margin to the mix simply changes your decision rule points. You'll still have to deal with the reality that we're dealing with imperfect measurements of an extremely complex market that's constantly shifting.
Last edited by willthrill81 on Sun Feb 03, 2019 6:58 pm, edited 1 time in total.
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Re: My trend following strategy and experience

Post by willthrill81 » Sun Feb 03, 2019 6:56 pm

siamond wrote:
Sun Feb 03, 2019 6:42 pm
I am very wary about trend following, but I don't have a good solid reason for it (data driven or else), to be honest, just a gut feeling. In any case, I applaud Will's eagerness to be fully transparent as things unfold. This will be quite fascinating to follow. Good luck!

PS. I agree with the previous poster that some kind of hysteresis mechanism would seem in order for such whipsaw-happy strategy...
Thanks for the well wishes.

As I noted above, my chosen strategy is much less 'whipsaw-happy' than price-only strategies (i.e. two signals must both be 'on' for me to move out of stocks rather than just one), which is part of the reason that I opted for it instead.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: My trend following strategy and experience

Post by BlueEars » Sun Feb 03, 2019 8:09 pm

willthrill81 wrote:
Sun Feb 03, 2019 6:54 pm
BlueEars wrote:
Sun Feb 03, 2019 5:24 pm
If it were me I'd want a margin to avoid noisy data causing unnecessary switches. One unnecessary switch can be quite costly. I don't have any great ideas for how to get at the amount of noise in the data. Clearly BLS surveys of unemployment are a statistical procedure and have some +- error.

I'm retired and probably have a different view of "the long term" then you. :happy
Those who are very concerned about whipsaws should probably steer clear of trend following. Even with the multiple signals my system requires for me to be out of stocks, which significantly reduces the opportunity for whipsaws compared to a price-only strategy like the 200 DMA, whipsaws will occur. That's just part of the price to be paid for the strategy. Part of buy-and-hold's price is deep drawdowns. Pick your poison.
...
I am just making the case for careful methodology design, not a total change. It may be you have optimized this already. What I'd do is take a long term index like the SP500 + dividends that goes back to the 1950's. Then put together a spreadsheet. The UER data goes back to the 1950's too. Then I'd look how large I can make the variable of UER minus 12 MMA before the CAGR went down for the full period and some subperiods. I'd also look at maybe 1 month of upward UER or multiple consecutive month's give the best results. Anyway just a thought.

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Re: My trend following strategy and experience

Post by nps » Mon Feb 04, 2019 7:05 am

willthrill81 wrote:
Sat Feb 02, 2019 1:27 pm
nps wrote:
Sat Feb 02, 2019 9:17 am
willthrill81 wrote:
Sat Feb 02, 2019 8:30 am
nps wrote:
Sat Feb 02, 2019 7:13 am
willthrill81 wrote:
Fri Feb 01, 2019 9:07 pm


I use Portfolio Visualizer to do my calculations, and it uses the price of the last trading day of each month.
I wonder what I'm not seeing then. The end of month price history of VEIEX on Vanguard's website is:

07/31/2018 $27.61
08/31/2018 $26.63
09/28/2018 $25.99
10/31/2018 $24.02
11/30/2018 $25.09
12/31/2018 $24.19
01/31/2019 $26.25

The average is $25.68 which is less than the price on 1/31/2019, so the index fund appears to be above its 7 month moving average.
I'm not exactly sure where the discrepancy is, but I'm not concerned about it. It's probably because the total bond market fund has had higher relative strength than VEIEX, so I'm in the former.
I don't understand that. Your rule was stated as "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." You are now saying you consider a bond fund to be a stock index?

Also, what do you mean by relative strength? VEIEX is 2.2 percent above its 7MMA, while VBFMX (Vanguard Total Bond Market Index Fund) is only 1.3 percent over its 7MMA.

Your approach is rules-based to the point of keeping or selling all of your stocks based on the impact of a change as small as one-hundredth of one percent in the unemployment rate, so it's hard to understand why you seem to be more cavalier about other rules such as what constitutes a stock fund or whether a stock fund that's moved 2.2 percent beyond a trigger point that you defined yourself should cause you to act.
I didn't specify it in the OP, but if VBMFX has had higher relative strength (as measured by PV, the tool I'm using rather than calculating all of this manually; consult it if you want more details on the specifics) than all of my available stock indices (in addition, of course, to the UER being above its 12 MMA), I will move into fixed income.
So would a more complete description of your strategy read like this?

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 OR there is an available non-stock fund that has a higher relative strength than all available stock funds

I poked around PV a little but didn't find how it calculates relative strength. As I understand the concept for specific stocks, it's a relationship between the price of the specific stock relative to a relevant index (e.g. Microsoft as compared to the SP500). If that's the concept you are using when looking at overall indices, are they all being compared to some benchmark in a similar way?

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Re: My trend following strategy and experience

Post by willthrill81 » Mon Feb 04, 2019 8:36 am

nps wrote:
Mon Feb 04, 2019 7:05 am
willthrill81 wrote:
Sat Feb 02, 2019 1:27 pm
nps wrote:
Sat Feb 02, 2019 9:17 am
willthrill81 wrote:
Sat Feb 02, 2019 8:30 am
nps wrote:
Sat Feb 02, 2019 7:13 am


I wonder what I'm not seeing then. The end of month price history of VEIEX on Vanguard's website is:

07/31/2018 $27.61
08/31/2018 $26.63
09/28/2018 $25.99
10/31/2018 $24.02
11/30/2018 $25.09
12/31/2018 $24.19
01/31/2019 $26.25

The average is $25.68 which is less than the price on 1/31/2019, so the index fund appears to be above its 7 month moving average.
I'm not exactly sure where the discrepancy is, but I'm not concerned about it. It's probably because the total bond market fund has had higher relative strength than VEIEX, so I'm in the former.
I don't understand that. Your rule was stated as "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." You are now saying you consider a bond fund to be a stock index?

Also, what do you mean by relative strength? VEIEX is 2.2 percent above its 7MMA, while VBFMX (Vanguard Total Bond Market Index Fund) is only 1.3 percent over its 7MMA.

Your approach is rules-based to the point of keeping or selling all of your stocks based on the impact of a change as small as one-hundredth of one percent in the unemployment rate, so it's hard to understand why you seem to be more cavalier about other rules such as what constitutes a stock fund or whether a stock fund that's moved 2.2 percent beyond a trigger point that you defined yourself should cause you to act.
I didn't specify it in the OP, but if VBMFX has had higher relative strength (as measured by PV, the tool I'm using rather than calculating all of this manually; consult it if you want more details on the specifics) than all of my available stock indices (in addition, of course, to the UER being above its 12 MMA), I will move into fixed income.
So would a more complete description of your strategy read like this?

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 OR there is an available non-stock fund that has a higher relative strength than all available stock funds
Yes, that's right.
nps wrote:
Mon Feb 04, 2019 7:05 am
I poked around PV a little but didn't find how it calculates relative strength. As I understand the concept for specific stocks, it's a relationship between the price of the specific stock relative to a relevant index (e.g. Microsoft as compared to the SP500). If that's the concept you are using when looking at overall indices, are they all being compared to some benchmark in a similar way?
PV has information on it on their FAQ page. Here's a snippet from it:
The relative strength model uses the relative strength of an asset compared to other assets to decide which assets to invest in. The model favors assets with the best recent performance (momentum), and invests in one or more assets based on a performance ranked list of assets.
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Re: My trend following strategy and experience

Post by foo.c » Tue Feb 05, 2019 9:05 am

The way stocks have rebounded, they could be back above their moving average soon. VTI is almost there.

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Re: My trend following strategy and experience

Post by Independent George » Tue Feb 05, 2019 11:12 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 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.
I understand your reasoning, and applaud your attempt to take your own psychology into account. My biggest concern, though, is that you might be creating new behavioral issues in the process, especially in a period of high volatility.

First, by requiring a certain amount of activity in tracking market performance and market indicators, you actually seem to be increasing the potential for stress and regret than decreasing it. Even following an algorithm, the temptation is there to track it against another one (for example, using a 10-month moving average instead of a 7-month), and eventually start rationalizing why this month's signal to buy/sell was really due to an outlier. While the algorithm is supposed to mitigate that, there is a good chance that the monitoring required to follow it will actually make it worse.

I would agree that regret minimization is a damned good reason for you to try this; I am just not convinced that this will actually reduce your regret. Replacing the conscious effort required to hold to your AA in the face volatility with the conscious effort required to hold to the algorithm in the face of volatility does not seem to be an improvement.

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Re: My trend following strategy and experience

Post by siamond » Tue Feb 05, 2019 12:14 pm

Independent George wrote:
Tue Feb 05, 2019 11:12 am
I would agree that regret minimization is a damned good reason for you to try this; I am just not convinced that this will actually reduce your regret. Replacing the conscious effort required to hold to your AA in the face volatility with the conscious effort required to hold to the algorithm in the face of volatility does not seem to be an improvement.
Yes, this is a good point. I would also add that an issue I have with such technical algorithm is that it would have worked in the past if you held onto it for decades in a row. Now enter behavioral issues. The OP clearly has an engineering and do-it-yourself mindset, which I applaud, but this could quickly turn into a behavioral trap. Say that after 5 years, things are NOT going according to plan and/or the OP learns a lot more about other trend following methods. What would a good engineer do? Find a better plan. Maybe the 7-months moving average wasn't such a good decision. Or whatever other detail of the algorithm. It would be SO HARD to resist the temptation to tweak things. And then, who knows, maybe tweaking would indeed be the right thing to do, or maybe it would NOT be, there is just no way to know. And this will probably never stop. And be ultimately harmful.

I have seen that with my own fixed AA. I will openly admit that I tweaked it quite a few times between 2011 and 2017. Heck, I was learning new stuff, analyzing things in more depth, I always had a good reason (none of it was due to recency events, at least I hope so). Then I started to realize that my engineering mindset was shooting in my own foot and decided to settle down (at least try hard!). I also analyzed various Tactical Asset Allocations algorithms in the past (trend following as explained by the OP is basically a form of TAA) and I ended up with the same conclusions, yes, you can find something interesting, but... some much uncertainties and doubts and new ideas, it will never stop moving.

Anyhoo, I am not shooting at the OP here, I -somewhat- understand where he is coming from, I can't dispute the past results, and I applaud his transparency, but... call me very skeptical. The human brain WILL get in the way.

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Re: My trend following strategy and experience

Post by BlueEars » Tue Feb 05, 2019 12:31 pm

I don't think there is any substitute for thinking and being open to new ideas for investing. Many of the active users of this site are forever analyzing new ideas and reexamining old ones.

I get a kick out of this stuff myself. FWIW, I personally change my methods as new insights emerge. I do keep a diary of changes in one Excel sheet and aim for very few line entries each year.

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Re: My trend following strategy and experience

Post by HomerJ » Tue Feb 05, 2019 12:36 pm

willthrill81 wrote:
Fri Jan 18, 2019 10:57 am
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.
Hey I must have missed this thread the first time you posted it.

Thanks for laying everything out. I'm interested to watch how this works for you.

I'm not quite sure how your system is better than just having some money in fixed income all the time. When you are 100% out of stocks, you are 100% in fixed income, so how would this system have protected you in 1977-1981?

Like you, I don't need great returns to make my financial goals.

So I'm just 50/50. Yes my returns are muted, but my risk profile remains pretty low as well.

You seem to be trying to get the best of both worlds. You want the higher returns during the good times (which you don't really need), and still want to avoid the negative returns from the bad times.

Again, thanks for posting all this. It's a very thoughtful and interesting experiment.
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Re: My trend following strategy and experience

Post by HomerJ » Tue Feb 05, 2019 12:41 pm

willthrill81 wrote:
Fri Jan 18, 2019 2:17 pm
Just to be very clear, I'm not predicting where the market is going next. What I'm doing is playing the historic odds. Historically, when the market was in its current position as defined by the two signals used in my approach, its performance was not good, certainly not good enough for me to want to remain in stocks. This is akin to rolling a die where you 'win' if any number higher than 2 is rolled but 'lose' if 1 or 2; you cannot predict which side of the die will come up, but over the long-term, the expected value is in your favor. That's the basic situation that I'm aiming to be in.
My only comment about "playing the odds"...

It's a little extreme to go 100% all in one way or the other when "playing the odds". That can be a recipe for disaster.

Making a bunch of little bets when the odds are in your favor is smart gambling; betting your entire bankroll is not.
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Re: My trend following strategy and experience

Post by goingup » Tue Feb 05, 2019 12:59 pm

I think whole thread is a collective fail by the Boglehead community. Why the deference and applause for a market timing scheme? Why aren't forum veterans pointing out that buying and selling of an entire portfolio based on some economic indicators is ill-considered?

Most folks who have put forth timing schemes like this been thumped with a collective BH response. Jack Bogle famously said he didn't know anybody could successfully time the Market and didn't know anybody who knew anybody who could successfully time the Market. That usually is the standard response when these threads are floated.

Willthrill's timing method may appear more data driven and less random, but it's still something we older experienced investors should discourage, if just for the sake of all the newbies reading along!

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Re: My trend following strategy and experience

Post by Independent George » Tue Feb 05, 2019 1:15 pm

goingup wrote:
Tue Feb 05, 2019 12:59 pm
I think whole thread is a collective fail by the Boglehead community. Why the deference and applause for a market timing scheme? Why aren't forum veterans pointing out that buying and selling of an entire portfolio based on some economic indicators is ill-considered?
Mostly because (1) it's not our money, (2) he saves a lot and can afford to under-perform, and (3) he's not leveraged. It is not ideal, but the OP has already stated he's not interested in optimization, and if this is what he wants to do, it's his choice. I don't agree with hit, and based on the replies, neither does most everyone else. But the worst case scenario here seems to be opportunity costs and underperformance, as opposed to tanking his entire retirement account with leverage and derivatives.

Again - I don't agree with this strategy, and think it is likely to hurt him in the long-term. But I also don't see the point in moral condemnation. If we can't talk him out of it, we may as well wait to see how it turns out.

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Re: My trend following strategy and experience

Post by HomerJ » Tue Feb 05, 2019 1:47 pm

goingup wrote:
Tue Feb 05, 2019 12:59 pm
I think whole thread is a collective fail by the Boglehead community. Why the deference and applause for a market timing scheme? Why aren't forum veterans pointing out that buying and selling of an entire portfolio based on some economic indicators is ill-considered?

Most folks who have put forth timing schemes like this been thumped with a collective BH response. Jack Bogle famously said he didn't know anybody could successfully time the Market and didn't know anybody who knew anybody who could successfully time the Market. That usually is the standard response when these threads are floated.

Willthrill's timing method may appear more data driven and less random, but it's still something we older experienced investors should discourage, if just for the sake of all the newbies reading along!
Probably because most of us like willthrill :)

Yeah, it's a total market-timing move. 100% swings seem really extreme to me.

But it probably won't hurt him too bad... He can afford to under-perform by 2%-4%, which is probably his worse case.

I still think it would be better to swing from 75/25 to 25/75. 100% swings is more likely to cause regret and second-guessing if it doesn't work out like he hopes it will.
The J stands for Jay

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Re: My trend following strategy and experience

Post by marcopolo » Tue Feb 05, 2019 1:54 pm

HomerJ wrote:
Tue Feb 05, 2019 1:47 pm
goingup wrote:
Tue Feb 05, 2019 12:59 pm
I think whole thread is a collective fail by the Boglehead community. Why the deference and applause for a market timing scheme? Why aren't forum veterans pointing out that buying and selling of an entire portfolio based on some economic indicators is ill-considered?

Most folks who have put forth timing schemes like this been thumped with a collective BH response. Jack Bogle famously said he didn't know anybody could successfully time the Market and didn't know anybody who knew anybody who could successfully time the Market. That usually is the standard response when these threads are floated.

Willthrill's timing method may appear more data driven and less random, but it's still something we older experienced investors should discourage, if just for the sake of all the newbies reading along!
Probably because most of us like willthrill :)

Yeah, it's a total market-timing move. 100% swings seem really extreme to me.

But it probably won't hurt him too bad... He can afford to under-perform by 2%-4%, which is probably his worse case.

I still think it would be better to swing from 75/25 to 25/75. 100% swings is more likely to cause regret and second-guessing if it doesn't work out like he hopes it will.
I agree with this, and would add that willthrill is not recommending this for other, he appears to understand the downside risk to the approach, and he is not bragging about how great he is doing with it.

It's not for me, but i am curious to see how it turns out.
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 HomerJ » Tue Feb 05, 2019 2:04 pm

marcopolo wrote:
Tue Feb 05, 2019 1:54 pm
and he is not bragging about how great he is doing with it.
That's a good point, and a prime difference between this thread and other market-timing threads we've seen in the past.

Market-timer's thread too was like this one, and it was better received than most for the same reasons.
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Re: My trend following strategy and experience

Post by goingup » Tue Feb 05, 2019 3:24 pm

Independent George wrote:
Tue Feb 05, 2019 1:15 pm
goingup wrote:
Tue Feb 05, 2019 12:59 pm
I think whole thread is a collective fail by the Boglehead community. Why the deference and applause for a market timing scheme? Why aren't forum veterans pointing out that buying and selling of an entire portfolio based on some economic indicators is ill-considered?
Mostly because (1) it's not our money, (2) he saves a lot and can afford to under-perform, and (3) he's not leveraged. It is not ideal, but the OP has already stated he's not interested in optimization, and if this is what he wants to do, it's his choice. I don't agree with hit, and based on the replies, neither does most everyone else. But the worst case scenario here seems to be opportunity costs and underperformance, as opposed to tanking his entire retirement account with leverage and derivatives.

Again - I don't agree with this strategy, and think it is likely to hurt him in the long-term. But I also don't see the point in moral condemnation. If we can't talk him out of it, we may as well wait to see how it turns out.
Moral condemnation seems like an extreme characterization. It's more about sending the usual message that market timing, and especially extreme shifts, is likely to be unsuccessful.

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goingup
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Re: My trend following strategy and experience

Post by goingup » Tue Feb 05, 2019 3:28 pm

HomerJ wrote:
Tue Feb 05, 2019 1:47 pm
goingup wrote:
Tue Feb 05, 2019 12:59 pm
I think whole thread is a collective fail by the Boglehead community. Why the deference and applause for a market timing scheme? Why aren't forum veterans pointing out that buying and selling of an entire portfolio based on some economic indicators is ill-considered?

Most folks who have put forth timing schemes like this been thumped with a collective BH response. Jack Bogle famously said he didn't know anybody could successfully time the Market and didn't know anybody who knew anybody who could successfully time the Market. That usually is the standard response when these threads are floated.

Willthrill's timing method may appear more data driven and less random, but it's still something we older experienced investors should discourage, if just for the sake of all the newbies reading along!
Probably because most of us like willthrill :)
All the more reason to treat him the same as any other misguided investor. :D

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hdas
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Re: My trend following strategy and experience

Post by hdas » Tue Feb 05, 2019 3:33 pm

goingup wrote:
Tue Feb 05, 2019 3:24 pm
Independent George wrote:
Tue Feb 05, 2019 1:15 pm
goingup wrote:
Tue Feb 05, 2019 12:59 pm
I think whole thread is a collective fail by the Boglehead community. Why the deference and applause for a market timing scheme? Why aren't forum veterans pointing out that buying and selling of an entire portfolio based on some economic indicators is ill-considered?
Mostly because (1) it's not our money, (2) he saves a lot and can afford to under-perform, and (3) he's not leveraged. It is not ideal, but the OP has already stated he's not interested in optimization, and if this is what he wants to do, it's his choice. I don't agree with hit, and based on the replies, neither does most everyone else. But the worst case scenario here seems to be opportunity costs and underperformance, as opposed to tanking his entire retirement account with leverage and derivatives.

Again - I don't agree with this strategy, and think it is likely to hurt him in the long-term. But I also don't see the point in moral condemnation. If we can't talk him out of it, we may as well wait to see how it turns out.
Moral condemnation seems like an extreme characterization. It's more about sending the usual message that market timing, and especially extreme shifts, is likely to be unsuccessful.
Not to mention the incumbent was released from his equities 200 points lower. :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

Independent George
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Re: My trend following strategy and experience

Post by Independent George » Tue Feb 05, 2019 4:03 pm

goingup wrote:
Tue Feb 05, 2019 3:24 pm
Moral condemnation seems like an extreme characterization. It's more about sending the usual message that market timing, and especially extreme shifts, is likely to be unsuccessful.
True, but this is not an attempt to outgain the market by predicting the troughs; it's a momentum strategy to reduce volatility by cutting off drawdowns at the cost of reduced gains. As I understand it, it does work if you are willing to accept the tradeoff. Is it better than just holding 60/40? Probably not, and going 100% in/out seems likely to be more volatile than less. And I've already outlined above why I think it is likely to cause a behavior trap than remedy one.

At the end of the day, though, he already knows all those arguments against (not least of all because he's read them here). Win or lose, it's his money to do as he sees fit with. He's already committed to this path; all we can do at this point is hope it works out for him.

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willthrill81
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Re: My trend following strategy and experience

Post by willthrill81 » Tue Feb 05, 2019 7:00 pm

siamond wrote:
Tue Feb 05, 2019 12:14 pm
Independent George wrote:
Tue Feb 05, 2019 11:12 am
I would agree that regret minimization is a damned good reason for you to try this; I am just not convinced that this will actually reduce your regret. Replacing the conscious effort required to hold to your AA in the face volatility with the conscious effort required to hold to the algorithm in the face of volatility does not seem to be an improvement.
Yes, this is a good point. I would also add that an issue I have with such technical algorithm is that it would have worked in the past if you held onto it for decades in a row. Now enter behavioral issues. The OP clearly has an engineering and do-it-yourself mindset, which I applaud, but this could quickly turn into a behavioral trap. Say that after 5 years, things are NOT going according to plan and/or the OP learns a lot more about other trend following methods. What would a good engineer do? Find a better plan. Maybe the 7-months moving average wasn't such a good decision. Or whatever other detail of the algorithm. It would be SO HARD to resist the temptation to tweak things. And then, who knows, maybe tweaking would indeed be the right thing to do, or maybe it would NOT be, there is just no way to know. And this will probably never stop. And be ultimately harmful.

I have seen that with my own fixed AA. I will openly admit that I tweaked it quite a few times between 2011 and 2017. Heck, I was learning new stuff, analyzing things in more depth, I always had a good reason (none of it was due to recency events, at least I hope so). Then I started to realize that my engineering mindset was shooting in my own foot and decided to settle down (at least try hard!). I also analyzed various Tactical Asset Allocations algorithms in the past (trend following as explained by the OP is basically a form of TAA) and I ended up with the same conclusions, yes, you can find something interesting, but... some much uncertainties and doubts and new ideas, it will never stop moving.

Anyhoo, I am not shooting at the OP here, I -somewhat- understand where he is coming from, I can't dispute the past results, and I applaud his transparency, but... call me very skeptical. The human brain WILL get in the way.
I understand that I'm likely to be my biggest enemy here, but I believe that I can manage my emotions better with this strategy than with any buy-and-hold AA.

With buy-and-hold, investor behavior is also likely to be the lynch pin. Yes, it's true that buy-and-hold doesn't require the monitoring and occasional reallocation of my strategy, but it's historically likely to result in deeper (i.e. more painful) drawdowns as well. It's a simpler road, to be sure, but I don't think that it's the easier road 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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willthrill81
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Re: My trend following strategy and experience

Post by willthrill81 » Tue Feb 05, 2019 7:02 pm

HomerJ wrote:
Tue Feb 05, 2019 1:47 pm
goingup wrote:
Tue Feb 05, 2019 12:59 pm
I think whole thread is a collective fail by the Boglehead community. Why the deference and applause for a market timing scheme? Why aren't forum veterans pointing out that buying and selling of an entire portfolio based on some economic indicators is ill-considered?

Most folks who have put forth timing schemes like this been thumped with a collective BH response. Jack Bogle famously said he didn't know anybody could successfully time the Market and didn't know anybody who knew anybody who could successfully time the Market. That usually is the standard response when these threads are floated.

Willthrill's timing method may appear more data driven and less random, but it's still something we older experienced investors should discourage, if just for the sake of all the newbies reading along!
Probably because most of us like willthrill :)
The feeling's mutual. :beer
HomerJ wrote:
Tue Feb 05, 2019 1:47 pm
But it probably won't hurt him too bad... He can afford to under-perform by 2%-4%, which is probably his worse case.
That's my assessment as well. I don't think that I'm likely to significantly underperform an 85/15 fixed AA over the long-term, which most here would consider to be aggressive anyway.
[/quote]
“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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