Yes, I got whipsawed by the last correction by about 10%. However, my strategy does not use price alone. While I don't have any taxable accounts, one could use futures options to effectively zero out one's long position in equities rather than sell for tax efficiency.garlandwhizzer wrote: ↑Wed May 15, 2019 12:28 pmI have a practical application question for willthrill81 about his trend following strategy in action in the recent past. Please excuse me if you have answered this before, willthrill81, in some other post but I am curious. The market decline last fall climaxed on Christmas Eve with a 19+% drop in the S&P 500. I suspect but do not know for sure that such a decline initiated a sell of equity in your trend following strategy. I assume that your equity was in a tax-deferred account so taxes would not have been initiated by this move. If equity had been in a non-tax deferred account that move would have generated unanticipated taxes right at the end of the tax year, not a good thing. So I assume this trend following strategy is presumably for tax deferred accounts only for tax efficiency.
My strategy only calls for me to take action no more than once per month.garlandwhizzer wrote: ↑Wed May 15, 2019 12:28 pmThe other question I have is about subsequent market action. Having sold equity at or near the bottom of that long decline, presumably you were not on board when the market suddenly skyrocketed back up, recovered all those loses, and even went on to new highs. Did your strategic rules for trend following allow you to take advantage of that rather quick and rather steep rebound? I realize that the market could have kept on dropping and turned into a severe bear market. Trend following protected you from that outcome but it seems that protection does not come free of charge. There was an opportunity cost relative to a buy and hold strategy in this case. That doesn't suggest that trend following is a bad strategy, just that like other strategies that protect from downside market volatility, it costs for that protection. Picking the right point to get back into the market after a decline can be tricky.
Market timing is difficult because it involves making two decisions well--when to sell out and when to buy back in. For most of us, it's hard enough to get one of these right, let alone both. Just curious, how well did your trend following parameters navigate this recent episode?
I'm not saying that this is you, but many are under the mistaken belief that trend following is meant to protect against all market declines, but this is of course impossible. It is meant to protect against deep drawdowns, which it has historically done well compared to buy-and-hold.
Also, it's not quite correct to say that you have to make two correct decisions; trend following will not sell at the peak, nor will it buy at the bottom of the trough. In reality, you come out ahead of BAH if you buy back in at a lower price than you sold.
I'm not at all concerned about the recent whipsaw because I knew full well when I adopted my strategy that they would occur. It's like questioning BAH as a strategy when you experience a 30% drawdown in stocks. In both cases, we should be focused on long-term results. As Paul Merriman, who practices both trend following and BAH has said, "A year in the market is just noise."