Dual Momentum Permanent Portfolio (DMPP)

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ochotona
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Dual Momentum Permanent Portfolio (DMPP)

Post by ochotona » Sun Jan 10, 2016 10:10 am

All simulations done at PortfolioVisualizer.com

Using mutual funds SNXFX, SWISX, SWLBX (US equities, International equities, Bonds)

1999-2015 GEM model: CAGR 6.87%, StdDev 12.89%, MaxDD -20.76%, Sharp 0.51
1999-2015 B&H Model (75% US, 25% Intl): CAGR 4.76%, StdDev 15.44%, MaxDD -52.38%, Sharpe 0.26

Insight: Better to use the GEM. You could run 63% GEM and still have the same portfolio MaxDD due to equities as you'd suffer with 25% equities Buy & Hold

Using GLD ETF

2006-2015 Absolute Momentum: CAGR 8.43%, StdDev 16.02%, MaxDD -23.83%, Sharpe 0.52
2006-2015 Buy & Hold: CAGR 7.00%, StdDev 19.20%, MaxDD -42.91%, Sharpe 0.39

Insight: Better to use Absolute Momentum on GLD. All other things being equal, you could carry up to 45% gold in the portfolio, and have the same MaxDD to the portfolio.


Using VUSTX mutual fund (long bonds)

1998-2015 Absolute Momentum: CAGR 6.69%, StdDev 8.81%, MaxDD -12.89%, Sharpe 0.41
1998-2015 Buy & Hold: CAGR 6.86%, StdDev 10.26%, MaxDD -16.68%, Sharpe 0.50

Insight: Absolute Momentum doesn't help with Long Bonds over this time period. Bonds are volatile in price; but price isn't all you get. You get the coupon as well, and the long bond coupon is bigger than for short bonds. Like interest from a dividend aristocrat stock, that help you to keep the asset from a total return to shareholder point of view. Antonacci advocates using momentum on bonds, but Faber concedes it may not be worth the bother. Over a long period of time, it could be a smaller effect than what we see with equities.

My takeways are: definitely use Dual Momentum GEM for equities, and you can at least double the portion of equities in the PP and have the same level of risk. Definitely use Absolute Mometum for the ETF part of your gold (not much you can do for the physical, because it may be hard to re-buy it quickly when you needed it for portfolio insurance, and there are high transactions costs); maybe hold half physical gold, half ETF gold? Whatever your preference is.

Cash and Long bonds: no change. By the way, in case you didn't know, 50% Long US Treasuries + 50% cash is equivalent to 75% 10-year Treasuries + 25% cash when you simulate those two fixed income portfolios at PortfolioVisualizer.com

Acknowleged weakness in this analysis... I don't have a way to simulate this all holistically. I don't know way happens really to the whole thing if I double equities and lose lots of portfolio insurance (gold). You can't just tweak one thing at a time to estimate the total portfolio effect. Should I decrease the bonds and cash then to keep the insurance? But I need bonds and cash to keep a few years of food to eat in retirement, if I am retired.

My approach is to build the portfolio backwards from the food-to-eat question: In retirement, I want cash and bonds at least to cover 4 years of future living expenses. I want insurance to cover 50% of the bonds and cash if gold is timely per Absolute Mometum (which is what the PP does... it has enough gold to cover half of the bonds and cash). The rest could be GEM.

This entire discussion is tilted toward my prejudice, the question of how to enlarge the growth engine in the PP in a non-risky way. That might not be your objective. If your objective is to increase portfolio insurance, the answer is to layer on Gold ETF when it is timely; maybe you don't care about the growth engine based on your needs.

My thoughts for the day.
Last edited by ochotona on Sun Jan 10, 2016 10:15 am, edited 1 time in total.
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Re: Dual Momentum Permanent Portfolio (DMPP)

Post by D1984 » Sun Jan 10, 2016 12:10 pm

ochotona wrote:
Using VUSTX mutual fund (long bonds)

1998-2015 Absolute Momentum: CAGR 6.69%, StdDev 8.81%, MaxDD -12.89%, Sharpe 0.41
1998-2015 Buy & Hold: CAGR 6.86%, StdDev 10.26%, MaxDD -16.68%, Sharpe 0.50

Insight: Absolute Momentum doesn't help with Long Bonds over this time period. Bonds are volatile in price; but price isn't all you get. You get the coupon as well, and the long bond coupon is bigger than for short bonds. Like interest from a dividend aristocrat stock, that help you to keep the asset from a total return to shareholder point of view. Antonacci advocates using momentum on bonds, but Faber concedes it may not be worth the bother. Over a long period of time, it could be a smaller effect than what we see with equities.
Ochotona,

Can you redo the simulation for absolute momentum on long bonds but do it using a zero-coupon fund (zeros are more volatile in price than regular bonds and have no coupon; as such, all your gain--or loss--comes from price changes)? I know WHOSX's portfolio has been roughly 50/50 regular LTTs and LTT Zeros since at least 1998 so what happens if you run either absolute momentum or the other momentum screen on this one from 1998-2015? I wouldn't recommend BTTRX for this screen since it is actually designed to have less and less duration risk as it reaches its maturity date but if you just want to try it on a "pure" (since WHOSX is still ~50% coupon bearing LTTs) zero fund then PEDIX goes back to late 2006 so maybe that one could be tested from 2007-2015?

Obviously if one substituted zeros for the LTTs one wouldn't use 25% of zeros since they are more volatile than LTTs; rather they would go with, say, 60% of the 25% bond portion allocation (in other words, 15% of the total portfolio) in zeros (which would be timed using absolute momentum method you mentioned) and the 40% of the 25% bond portion (i.e. 10% of the total portfolio) in cash or STTs.
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Re: Dual Momentum Permanent Portfolio (DMPP)

Post by ochotona » Sun Jan 10, 2016 4:19 pm

PEDIX doesn't work in PortfolioVisualizer.com either

By the way, to test Absolute Momentum, I choose the asset itself, then the other asset is CASHX. That fools the Dual Momentum test into doing a single Absolute Momentum test.

Bonds are tricky! They whip around like a nine-year old girl swinging a samurai sword.
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Re: Dual Momentum Permanent Portfolio (DMPP)

Post by dragoncar » Mon Jan 11, 2016 1:16 pm

Can you summarize gem?
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Re: Dual Momentum Permanent Portfolio (DMPP)

Post by ochotona » Mon Jan 11, 2016 2:02 pm

dragoncar wrote: Can you summarize gem?
http://www.dualmomentum.net/2014/01/int ... entum.html

Pick asset with larger 1 year return, US Stocks or International Stocks. If neither of them earning more than T-Bills, then invest in Total Bond Market. Re-evaluate once a month. Ignore all action in-between.
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Re: Dual Momentum Permanent Portfolio (DMPP)

Post by Dieter » Wed Jan 27, 2016 3:26 pm

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Re: Dual Momentum Permanent Portfolio (DMPP)

Post by ochotona » Wed Jan 27, 2016 6:31 pm

Dieter wrote: Another theory on Gold timing....

http://finance.yahoo.com/news/gold-metr ... 00436.html
That's a good one, thanks. It's the same signal, almost, as the default MACD indicator when you look at Yahoo! Finance weekly (5 year) charts for GLD, IAU, or SGOL.

Yup... buy gold someday... just not quite yet. Maybe this year. It might not actually get below $1000.
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Re: Dual Momentum Permanent Portfolio (DMPP)

Post by Dieter » Wed Jan 27, 2016 8:43 pm

12m return is bad for Gold, but not bad so far this year....
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Re: Dual Momentum Permanent Portfolio (DMPP)

Post by ochotona » Wed Jan 27, 2016 9:05 pm

Eventually, when we are making 12 month comparisons with December 2, 2015, gold will look better... unless it keeps on going down to make new lows. But if it trends horizontally, we may be buying some later in 2016.
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Re: Dual Momentum Permanent Portfolio (DMPP)

Post by ochotona » Sun Feb 07, 2016 10:24 am

lordmetroid wrote: A nice read to study how an Japanisation of the Economy could effect the Permanent Portfolio.

http://gestaltu.com/2012/09/the-permane ... nese.html/

The article also explores a few more rebalancing mechanism such as moving average and recent volatility. Haven't budd or ghost or someone been discussing this kind of additional rebalancing considerations in past threads?
I think using the 200-day moving average or 1-year lookback absolute momentum could be used as a trigger for rebalancing. It would not be frequent. It would only be necessary to use it on the GOLD and EQUITIES. For cash and bonds, keep the standard policy.

The point is, if you get an buying or selling opportunity clearly indicating by trend-following, it really behooves you to take it. Depending on your portfolio balances over time, which depend on random historical events (when you bought in, at what prices, when you hit the bands in the past, etc), you may or not not trigger that action using 15/35 bands.

I like objectivity and simplicity and rule-based actions, and tilting the odds in your favor. Momentum has been back-tested to the early 1800s. It's not a big "violation" of PP policy. It's a tweak, but I think it could prevent you from missing opportunities.
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Re: Dual Momentum Permanent Portfolio (DMPP)

Post by Pet Hog » Sun Feb 07, 2016 4:24 pm

ochotona wrote:
lordmetroid wrote: A nice read to study how an Japanisation of the Economy could effect the Permanent Portfolio.

http://gestaltu.com/2012/09/the-permane ... nese.html/

The article also explores a few more rebalancing mechanism such as moving average and recent volatility. Haven't budd or ghost or someone been discussing this kind of additional rebalancing considerations in past threads?
I think using the 200-day moving average or 1-year lookback absolute momentum could be used as a trigger for rebalancing. It would not be frequent. It would only be necessary to use it on the GOLD and EQUITIES. For cash and bonds, keep the standard policy.

The point is, if you get an buying or selling opportunity clearly indicating by trend-following, it really behooves you to take it. Depending on your portfolio balances over time, which depend on random historical events (when you bought in, at what prices, when you hit the bands in the past, etc), you may or not not trigger that action using 15/35 bands.

I like objectivity and simplicity and rule-based actions, and tilting the odds in your favor. Momentum has been back-tested to the early 1800s. It's not a big "violation" of PP policy. It's a tweak, but I think it could prevent you from missing opportunities.
Ochotono, I am confused about how the DMPP would be implemented.  What would you be holding right now?  What is the reallocation strategy?  Can you spell it out so a dummy like me can understand the process?

This is what I think you are saying.  Hold the traditional 4x25 PP with 35/15 bands.  Let's say that after a month it becomes 24% stocks, 28% 30-year treasuries, 23% gold, and 25% short-term treasuries.  Using the GEM strategy, check to see whether you should hold US stocks, international stocks, or the total bond market as your "stocks" portion.  It's possible that you would hold a total bond fund in place of US stocks.  So the portfolio might become 24% total bond market, 28% 30-year treasuries, 23% gold, and 25% short-term treasuries.  You would also use an absolute momentum strategy to check monthly whether gold is appropriate, substituting if for cash (short-term treasuries?) if necessary.  If so, your portfolio might be 24% total bond market, 28% 30-year treasuries, and 48% short-term treasuries (considered as two separate holdings of 23% for "gold" and 25% for "cash").  You still use the 35/15 bands to rebalance; you're just changing the nature of the stock and gold holdings on a month by month basis.  Is that correct?
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Re: Dual Momentum Permanent Portfolio (DMPP)

Post by ochotona » Sun Feb 07, 2016 4:58 pm

Pet Hog wrote: Ochotono, I am confused about how the DMPP would be implemented.  What would you be holding right now?  What is the reallocation strategy?  Can you spell it out so a dummy like me can understand the process?

This is what I think you are saying.  Hold the traditional 4x25 PP with 35/15 bands.  Let's say that after a month it becomes 24% stocks, 28% 30-year treasuries, 23% gold, and 25% short-term treasuries.  Using the GEM strategy, check to see whether you should hold US stocks, international stocks, or the total bond market as your "stocks" portion.  It's possible that you would hold a total bond fund in place of US stocks.  So the portfolio might become 24% total bond market, 28% 30-year treasuries, 23% gold, and 25% short-term treasuries.  You would also use an absolute momentum strategy to check monthly whether gold is appropriate, substituting if for cash (short-term treasuries?) if necessary.  If so, your portfolio might be 24% total bond market, 28% 30-year treasuries, and 48% short-term treasuries (considered as two separate holdings of 23% for "gold" and 25% for "cash").  You still use the 35/15 bands to rebalance; you're just changing the nature of the stock and gold holdings on a month by month basis.  Is that correct?
I realized that I am bunching together two momentum concepts that I should unravel. One is absolute momentum, the momentum of an asset just compared to to itself. This is a risk management process; if absolute momentum is too low, you turn that asset off (go to cash).

The other is cross-sectional momentum, the momentum of assets compared to each other. This is a ranking process. You choose to invest only in assets with more momentum.

Momentum can be measured in many different ways. One simple way, favored by Gary Antonacci, is 1 year total return of the asset. That's it.

Permanent Portfolio Momentum as of 2/5/16:
Cash (Ally Bank)                  1.00%
Long Term Bonds (TLO)      -0.40%
Gold (IAU)                            -7.74%
Stocks (SCHB)                    -8.79%

If you applied an Absolute Momentum filter, you'd be 100% Cash now. Because the Long Bonds, Gold, and Stocks are all (-), they all went to Cash.

If the three non-cash assets were performing better on a one-year momentum basis, you could use Dual Momentum, you could then not only go to Cash in poorly performing assets, you could CONCENTRATE on the assets which are performing RELATIVELY BETTER. So you could select the top 3 of 4, top 2 of 4, or top 1 of 4. But at this time, it's all in Cash anyway.

But most of the variability is due to stocks and gold, so you could just leave cash and long bonds alone at 25% each, and use Absolute Momentum on the stock and gold... switch them off and on. In which case, you'd be 75% cash, and 25% long bonds right now.

Using Absolute Momentum to trigger rebalancing is another application altogether. Let's say you didn't want to take the risk of going all-in, all-out on gold and stocks. You could rebalance when gold and stock momentum triggers go off (when they change to above or below the yield on cash), to maybe take advantage of a possibly propitious moment to buy or sell.

There are lots of ways to use momentum.
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Re: Dual Momentum Permanent Portfolio (DMPP)

Post by ochotona » Sun Feb 07, 2016 5:01 pm

Actually, I am posting the signals for the simpler, Absolute Momentum way to modify the PP in the thread "Trendfollowing signals for the PP". Cash and bond buy and hold, only turning gold and stocks off and on. Next update on 2/25/16.
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Re: Dual Momentum Permanent Portfolio (DMPP)

Post by Pet Hog » Sun Feb 07, 2016 5:28 pm

Thanks for the quick response.  It seems like my understanding of the process was close.  You didn't address the GEM concept.  Would you advise ever owning international stocks or a total bond market fund in place of US stocks?  That seems to go against the HBPP principles.
ochotona wrote: Using Absolute Momentum to trigger rebalancing is another application altogether. Let's say you didn't want to take the risk of going all-in, all-out on gold and stocks. You could rebalance when gold and stock momentum triggers go off (when they change to above or below the yield on cash), to maybe take advantage of a possibly propitious moment to buy or sell.
Just to be clear, here you are talking about rebalancing a vanilla PP back to 4x25 -- you are never swapping stocks or gold for cash.  Is that right?  I don't usually follow the discussions about momentum and other forms of market timing; excuse my ignorance, but has this approach been modeled?
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Re: Dual Momentum Permanent Portfolio (DMPP)

Post by ochotona » Sun Feb 07, 2016 6:16 pm

Pet Hog wrote: Thanks for the quick response.  It seems like my understanding of the process was close.  You didn't address the GEM concept.  Would you advise ever owning international stocks or a total bond market fund in place of US stocks?  That seems to go against the HBPP principles.

Just to be clear, here you are talking about rebalancing a vanilla PP back to 4x25 -- you are never swapping stocks or gold for cash.  Is that right?  I don't usually follow the discussions about momentum and other forms of market timing; excuse my ignorance, but has this approach been modeled?
CraigR did address owning foreign stocks in the PP, for up to 5-10% of the portfolio (p. 82) depending on user preference.

The GEM is discussed here.

No, I am actually talking about swapping gold to cash and stocks to cash if conditions get bad! Dr. Mebane Faber did it already, shown here. The results are pretty good! You get S&P500 returns with Permanent Portfolio volatility. The chart y-axis is logarithmic, so the wealth difference between PP and "timed" PP is actually very large.

Image

The idea behind trend-following the PP is... yes, you need gold, equities, cash, and bond... but you don't need them all at the same exact time, all the time.
Last edited by ochotona on Mon Feb 08, 2016 5:25 am, edited 1 time in total.
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Re: Dual Momentum Permanent Portfolio (DMPP)

Post by Pet Hog » Sun Feb 07, 2016 7:43 pm

Ah, it's getting clearer: you are using GEM merely as an indicator for timing your change in assets between stocks and cash.

Faber's chart appears at first glance to suggest that a momentum PP is vastly superior to a vanilla PP, but on second look I don't see much difference during the 1970s or from about the mid-80s onward.  Its glory period was from 1980 to 1982, where it really excelled.  That was a volatile time for all the components, so I guess the momentum approach avoided some big losses (e.g., holding gold in 1981).  Another thing to note is that he is considering monthly rebalancing also for the vanilla PP; I would like to see a chart for his momentum strategy against that for a vanilla 35/15 PP before concluding that it is indeed a better strategy.  Perhaps I'll work on that myself!

Thanks for your help, ochotono!
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Re: Dual Momentum Permanent Portfolio (DMPP)

Post by ochotona » Sun Feb 07, 2016 8:21 pm

This is the Dual Momentum GEM.

Image
Last edited by ochotona on Mon Feb 08, 2016 5:46 am, edited 1 time in total.
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Re: Dual Momentum Permanent Portfolio (DMPP)

Post by rickb » Sun Feb 07, 2016 10:59 pm

MangoMan wrote: Faber has neither a PhD nor an MD or other professional degree, so I'm not sure why you refer to him as Dr. Faber.
I suspect he's thinking about Marc Faber (who does have a PhD).
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Re: Dual Momentum Permanent Portfolio (DMPP)

Post by MachineGhost » Sun Apr 03, 2016 3:06 pm

After spending all day and night yesterday hacking Antonacci's Global Equities Momentum (GEM) model, you would be forgiven in thinking that the Dual Momentum concept adds a huge edge to any portfolio.  That is not the case.

To make a long story short, GEM is an example of the post hoc fallacy or in more layman terms, data mining.  The same exact criticisms I've applied elsewhere to the so-called value and size effects also applies here.

What drives the outsized gains in the GEM is the inclusion of essentially emerging markets exposure.  In the 1970's when the dollar was depreciating like mad, foreign equities were the emerging markets of its time and acted in an inverse relationship to the falling USD.  In fact, if you replace foreign equities with gold, there is essentially no performance difference (but you do wind up with a -43% maximum drawdown off a gold's peak.)

Around 1990, gold ceased to play its former role as a USD hedge and the torch shifted to the US for its dot.com bubble.  It is not until the early 2000's that the then emerging markets once again plays an outsized role, this time for another massive bubble it still has yet to recover from.  While gold did go up in this timeframe as well, it was no longer the main driver of returns vs emerging markets.

There's also a smaller effect from the bond bull market but it only adds a couple percent of CAGR's.

Bottom line: Curve fitting the symbol group to only those securities that had outsized returns in the past is pure data mining.  The past does not represent the future.  In fact, GEM absolutely sucks when run on other symbol groups.  Relative momentum alone is not enough to guarantee you will lasso the unicorns.  If only it were that easy, we'd all be super-rich.
Last edited by MachineGhost on Sun Apr 03, 2016 3:10 pm, edited 1 time in total.
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