Tactical Asset Allocation + HBPP an intriguing combo

[Mr Vacuum]

2009 is a textbook case for your second question. Looking at the graph you can see GEM got out after a few months of downturn while the market kept dropping a few more months. Other times there is no clear trend and GEM can whipsaw in and out and miss upturns.

GEM seems to do just as well on its own with less trading if you just crank up a fixed allocation and let it run.

Sounds like GEM does get out, thought a little late, but there is no real alternative. Did I get this right?

That's how I read it. The idea is it gets out a little late and it gets back in a little late, but on the whole saves about half the drawdown vs. buy and hold in corrections that exhibit sufficient trend to trip the triggers.

Check out the performance tab at optimalmomentum.com and play with the market timing calculators at portfoliovisualizer.com to get an idea how it has responded in the past.

How come the "monthly" do not add up to the "annual" there?

I can't say without reviewing the specific results. The monthly results should match the annual results when compounded, not added. If you already compounded and they still don't match, that would merit further study.

[ochotona]

Maybe it needs the full magic of your momentum/value/min-vol portfolio to get bonds and gold out of the way most of the time. I still can't believe the incredible backtest result you posted generated no discussion.

Is the monthly asset allocation from this method straightforward to compute? I'd be willing to take a look at it. But what I don't want to do is get myself into a lot of trading. I like that GEM has been steady since June 2017, and no change in sight.

[HappyMan]

Is the monthly asset allocation from this method straightforward to compute? I'd be willing to take a look at it. But what I don't want to do is get myself into a lot of trading. I like that GEM has been steady since June 2017, and no change in sight.

No kidding. I have to mentally stop myself from making any more moves and let GEM to carry itself. My only concern is, how long it will grow.

[InsuranceGuy]

[deleted]

[Mr Vacuum]

It's pretty straightforward, just need the last 10 months and the last 20 trading days of returns for each asset class.

It does trade a little bit more than GEM, but not a terrible amount, roughly 3x per year. On the other hand you are in 2 asset classes nearly all the time so there is less risk of big dip with all your eggs are in 1 asset class for GEM.

Incidentally roughly 3 trades/year is about what you would get running GEM for the stocks and trend following bonds and gold independently. My test shows right around 1.25 trades/year for each, so closer to 4 for the total.

[Mr Vacuum]

I love the PP, but for the investor who does not prefer to set it and forget it until each January, I think GEM makes a great pair with gold for dealing with the ebbs and flows of the dollar. Are we about to see a several year run of ex-US stocks outperforming? Who knows. GEM doesn't care.

This article points out some of the questions in the current economic and political climate. https://www.cbsnews.com/news/why-trumpi ... he-dollar/

For one, a weaker dollar makes U.S. Treasury bonds less attractive to foreign buyers, providing an upward lift to yields and thus pushing borrowing costs higher for consumers. And two, a weaker dollar will boost inflation pressures by raising the cost of imports and commodities like crude oil, which is traded globally in U.S. dollars (chart above).

The latter, when mixed with the inflationary pressures of a rapidly tightening labor market, could push the Federal Reserve into a much more hawkish monetary policy stance in 2018. That would surely prick the sentiment bubble among the cheap-money junkies who call themselves investors these days.

After Antonacci said on his blog that the performance of US vs. ex-US stocks is driven primarily by dollar flows, I tested it with the ACWI ex-US/S&P 500 ratio flipped, which revealed a symmetry that still takes me aback. RTM is from Bogle's tell-tale chart/reversion to the mean: ACWI ex-US cumulative returns divided by S&P 500 cumulative returns.

[ochotona]

That relation of the dollar index to US versus ex-US stock returns is remarkable.

[HappyMan]

After Antonacci said on his blog that the performance of US vs. ex-US stocks is driven primarily by dollar flows, I tested it with the ACWI ex-US/S&P 500 ratio flipped, which revealed a symmetry that still takes me aback. RTM is from Bogle's tell-tale chart/reversion to the mean: ACWI ex-US cumulative returns divided by S&P 500 cumulative returns.

Thank you for pointing it out. Your graph illustrates much better what Gary Antonacci is saying on his blog,

"When the U.S. dollar is strong, U.S. stocks tend to outperform non-U.S. stocks. Non-U.S. stocks outperform when the U.S. dollar is weak. Our simple relative momentum strategy takes advantage of global macro-economic trends. Just as it does not make sense to be simultaneously long and short the U.S. dollar, so it not the best idea to be long U.S and non-U.S. stocks at the same time. It would be better to own U.S. stocks when the U.S. dollar is strong, and to own non-U.S. stocks when the U.S. dollar is weak. Relative momentum automatically puts us on the right side of this macro-economic trend. There is no need to pay for global macro management."

I wish there was a system on this forum to highlight or upvote posts based on their worth. I'm sure many here would give your post a "+1".

[modeljc]

I read the GEM approach with interest. Any way to check the number of WIPSAWS over the 45 year backtest? It looked like 2015 was nothing but false trades. It does seem that being in the right asset class make up for the wipsaws and also makes up for being late in and late out.

[ochotona]

If you simulate the GEM at PortfolioVisualizer.com, you can go back into the 1980s with old mutual funds, you can get a sense of the whippiness. Yes, Winter of 2015 - 2016 was frustrating, for sure. And GEM is much less whippy than 200 day moving average. But it does deliver over time.

[modeljc]

If you simulate the GEM at PortfolioVisualizer.com, you can go back into the 1980s with old mutual funds, you can get a sense of the whippiness. Yes, Winter of 2015 - 2016 was frustrating, for sure. And GEM is much less whippy than 200 day moving average. But it does deliver over time.

Thanks. I be happy knowing the last 10 years. So 2015 is bad. How many wipsaws in that year? Do you know the last 10 years for the number of false trades? I am not lazy but I am 80 years old and do not trust myself. And I know someone has looked at this. Hoping to find a quick answer.

Thanks

[ochotona]

If you simulate the GEM at PortfolioVisualizer.com, you can go back into the 1980s with old mutual funds, you can get a sense of the whippiness. Yes, Winter of 2015 - 2016 was frustrating, for sure. And GEM is much less whippy than 200 day moving average. But it does deliver over time.

Thanks. I be happy knowing the last 10 years. So 2015 is bad. How many wipsaws in that year? Do you know the last 10 years for the number of false trades? I am not lazy but I am 80 years old and do not trust myself. And I know someone has looked at this. Hoping to find a quick answer.

Thanks

Wow, you're an intellectually active octogenarian like my Mom! Congratulations. Honestly, when I'm 75 I hope to have all of this Momentum stuff packed away and automated. But, because you asked, here it is, for ONE mutual fund which I owned for many years in the 1990s when I had little children, the famous Schwab 1000 Fund, SNXFX. This is not "dual" momentum, just single absolute momentum for this one fund. so in 25 years you have 19 trades, or one trade every 1.3 years.But, some periods only last one month, or two, or three.

There is a trend-following ETF that does this, VMOT from AlphaArchitect. I have gotten to know the people at that company somewhat, they seem very competent. The fund is somewhat expensive at 0.79% net expense ratio, it is untested through a downturn, but there is no reason to think it won't work as designed (trend-following triggers a switch to a downside protection scheme using options). It has been great in the bull market. It holds something like 160-200 different US and International stocks, so it's diversified as to industry, sector, country, currency. I don't know what to tell you. If I were you, and I thought the whole trading thing was getting to be too much, I'd take a chance and buy some, yes. The risk of missing an important trade is not something to dismiss, if you've decided momentum is what you want to do.

Maybe 25% VMOT, 25% S&P500, the rest your choice of bonds, gold, cash?

1 Jan 1993 Mar 1994 15 100.00% Schwab 1000 Index (SNXFX) SNXFX: 5.19% 5.19% 5.19%
2 Apr 1994 Apr 1994 1 100.00% Cash (CASHX) CASHX: 0.27% 0.27% 1.14%
3 May 1994 Jun 1994 2 100.00% Schwab 1000 Index (SNXFX) SNXFX: -1.53% -1.53% -1.53%
4 Jul 1994 Jul 1994 1 100.00% Cash (CASHX) CASHX: 0.28% 0.28% 3.21%
5 Aug 1994 Sep 1994 2 100.00% Schwab 1000 Index (SNXFX) SNXFX: 1.83% 1.83% 1.83%
6 Oct 1994 Feb 1995 5 100.00% Cash (CASHX) CASHX: 2.03% 2.03% 6.03%
7 Mar 1995 Nov 2000 69 100.00% Schwab 1000 Index (SNXFX) SNXFX: 186.87% 186.87% 186.87%
8 Dec 2000 Jul 2003 32 100.00% Cash (CASHX) CASHX: 6.74% 6.74% -20.21%
9 Aug 2003 Jan 2008 54 100.00% Schwab 1000 Index (SNXFX) SNXFX: 52.04% 52.04% 52.04%
10 Feb 2008 Oct 2009 21 100.00% Cash (CASHX) CASHX: 1.46% 1.46% -21.37%
11 Nov 2009 May 2012 31 100.00% Schwab 1000 Index (SNXFX) SNXFX: 33.59% 33.59% 33.59%
12 Jun 2012 Jun 2012 1 100.00% Cash (CASHX) CASHX: 0.00% 0.00% 3.82%
13 Jul 2012 Sep 2015 39 100.00% Schwab 1000 Index (SNXFX) SNXFX: 50.26% 50.26% 50.26%
14 Oct 2015 Oct 2015 1 100.00% Cash (CASHX) CASHX: 0.00% 0.00% 8.05%
15 Nov 2015 Jan 2016 3 100.00% Schwab 1000 Index (SNXFX) SNXFX: -6.81% -6.81% -6.81%
16 Feb 2016 Mar 2016 2 100.00% Cash (CASHX) CASHX: 0.04% 0.04% 6.74%
17 Apr 2016 Apr 2016 1 100.00% Schwab 1000 Index (SNXFX) SNXFX: 0.38% 0.38% 0.38%
18 May 2016 May 2016 1 100.00% Cash (CASHX) CASHX: 0.01% 0.01% 1.87%
19 Jun 2016 Dec 2017 19 100.00% Schwab 1000 Index (SNXFX) SNXFX: 31.45% 31.45% 31.45%
20 Jan 2018 Jan 2018 1 100.00% Schwab 1000 Index (SNXFX) -

[ochotona]

AlphaArchitect will also run the GEM strategy for you, by the way. They license a proprietary version from Gary Antonacci. They can be reached at AlphaArchitect.com, of course. I had my money with them for a while, but I got bored I suppose, I had to pull it back to Schwab and run it myself. It did cost 0.90% per year too, it didn't seem worth it, since I knew basically what they were doing.

[modeljc]

AlphaArchitect will also run the GEM strategy for you, by the way. They license a proprietary version from Gary Antonacci. They can be reached at AlphaArchitect.com, of course. I had my money with them for a while, but I got bored I suppose, I had to pull it back to Schwab and run it myself. It did cost 0.90% per year too, it didn't seem worth it, since I knew basically what they were doing.

Thanks for all the work. I am a happy camper in the PP but fear the low level of Interest rates have ruined any remaining sanity in the various asset classes. I fear that the market at 32 CAPE will cause a long period of bad returns and possibly a large drawdown.

I will check out Alpa ARchitect. Thanks again!

[ochotona]

Best wishes. I think there will be more and better trendfollowing products in coming years, especially after the next crash. Ironically, that will be the time when they are least needed. HBPP popularity will also be surging.

[modeljc]

Best wishes. I think there will be more and better trendfollowing products in coming years, especially after the next crash. Ironically, that will be the time when they are least needed. HBPP popularity will also be surging.

I want to THANK you for the link of the Portfolio Visualize. I have been there before but never got to the dual monentum. The late signals look OK. The whipsaws look ok. If you are lucky like me, you have all your stocks in non-taxables.

NO downside in a Vanguard IRA Account:

Commissions: none

Taxes: none

False signal: out too soon and missed gain is no problem in the account

Late to get in: got all your cash

Over time: VEU or SPY will produce the missed gain.

[ochotona]

No change to the GEM portfolio for February 2018. Still in 81% SCHF + 19% SCHE, or 100% in VEU. I am using SCHF ETF instead of SWISX Mutual Fund because I got an excessive trading warning letter from Schwab. It's not a big deal.

[ochotona]

Wes Gray just mentioned these competing products in his podcast... looks better than his own offerings for people who want to trend-follow large cap US stocks for use an an otherwise-HBPP structure:

Pacer ETFs

[ochotona]

Non US stocks back at lows from that panic Monday. This crap isn't over. Another waterfall may be ahead.

[Cortopassi]

No where to hide right now.

But I do feel a bit better with physical gold that can't go poof.

[tim47]

Why not use thes Pacer ETFs writhin a typical PP strategy. Are there downsides here???

[ochotona]

I won't use a trendfollowing ETF that hasn't been battle tested. I look forward to the day when I can.

[ochotona]

As a general rule, buying and holding junk debt via an index fund that owns the whole junk bond index is a losing trade but there are at least two instances where owning junk makes some sense.

1. The first is market timing; pick some of the junkiest of the junk bond funds (FAGIX comes to mind; they tend to own a lot of CCC-rated and unrated junk bonds) and put it into PortfolioVizualizer using a 10-month or 8-month or 12-month moving average. Beats the S&P 500 or total stock market with much lower drawdown. This seems to be because junk bonds sell off hard (far more than is justified by default rates vs recovery rates) during market falls but then lead the way during recoveries (see 1991-92, 2003, and 2009) when they go up in value at a far faster rate than stocks typically do; timing the market means you miss most of the downturn but capture much of the upturn. Timing the market with junk bond funds can have a Sortino above 2.

The things you learn on this forum... are simply amazing...

So I tested an old T.Rowe Price high yield bond mutual fund in PortfolioVisualizer.com, PRHYX, in Dual Momentum mode, 1 asset, risk-off asset was VFITX (US Treasury intermediate), 12-month lookback period.

From 1999-2018,

CAGR 7.82%, max drawdown 11%, Sortino ratio 1.86

It tests out about like a 60% GEM, 40% fixed income portfolio, but better in the Sortino ratio... it has a greater preponderence of upside variability (which people like)

CAGR 7.78, max drawdown 9%, Sortino ratio 1.48

And high-yield trend-following DOES snap back faster after a downturn... it got back into the market 90 days faster than GEM. I guess because companies want to get back to paying their bondholders back first after they get up from being walloped.

This is really food for thought, it could be a great thing for a tax-deferred account. High-yield would suck for a taxable account, though.

I spent the morning doing trend-following on the old PRHYX fund, and ETFs HYG and ANGL. ANGL is really interesting, but has a short history. HYG performs better than JNK, so I'm not considering JNK. PHB trades free at Schwab, but it's not a good performer.

The 200 day moving average or the 6-month Absolute Momentum seem to work about the same over a long period of time with PRHYX. The 6-month momentum thingy was also observed by Paul Novell in his Tactical Bond Portfolio.

It's worth noting that HYG and ANGL are BOTH BELOW the 200 day MA at this time! This is in line with the old trading adage that junk bonds sniff out risk in the market better than stacks; they are the coal mine canaries often.

[Mr Vacuum]

Huh. In fact in Antonacci's absolute momentum paper high yield bonds with absolute momentum show the highest Sharpe ratio and best improvement in volatility, a fact which I glossed over previously. PRHYX also does very well with SPY in dual momentum.

I see the data goes back to 1992. Are you using 1999 to torture the data and avoid a positive head start prior to the dotcom bust?

[ochotona]

I was looking all the way back to 1992. But this isn't something I'm going to rush into. Maybe on the other side of the future valley, and after interest rates have been going up a while, or in retirement.

Guggenheim BulletShares has highly diversified target date junk offerings. If after the next recession I see yields get above 7% for my retirement target date, I think that would be a place to invest a big chunk in. 7% CAGR is my portfolio stretch goal. If I get 7% CAGR I'd be thrilled.