PP Improvement Through Moving Average Purchase Adjustments

[fi50@fi2023]

I came across the following article while browsing the internet and wondered if it had been previously discussed here:  http://gestaltu.blogspot.com/2012/08/pe ... html.  Anyone using this type of adjustment to purchase timing?  Thanks in advance for sharing.

[ochotona]

I'm looking at the 43 week (301 day) SMA for SGOL (gold ETF) and I see buy and sell signals throughout 2014 and 2015. The Faber 300 day MA, as I understand, would not have helped my decision making at this present time, and gold is the most problematic component we'd like to find a solution for.


"The Faber model is to buy the S&P500 on a monthly close over the simple 10 month moving average; the sell strategy is to sell on any monthly close below the simple 10 month moving average."

[EdwardjK]

There are any number of strategies that demonstrate improved PP results.  I have read through many of these strategies and many appear reasonable, and have concluded it all depends on how much you want to be involved in managing your PP.

The basic PP has you buying equal parts equities, LT treasuries, gold and cash, with rebalancing only when any one asset balance falls outside of defined bands (value lower than 15% of your portfolio or higher than 35%).  Here, rebalancing may occur once a year.  During the other 364 days of the year you can sleep well knowing that your portfolio is not experiencing any great volatility.

Some investors may rebalance on a set day every year regardless of whether any asset value falls outside the rebalancing bands.  Some people will rebalance monthly, others quarterly.  Prior to the late 1990's, doing this resulted in transaction fees that ate into your return.  Today, that impact is much smaller today owing to significantly reduced transaction fees.  But every little bit counts.

Those who are a bit more adventurous will maintain their portfolio at other than an equal 25% allocation.  Some may tilt their portfolio to minimize volatility, others may want to tilt based upon some form of momentum. 

As for myself, I rebalance quarterly using the 63-day return as the weighting factor.  My number-crunching says I may earn about 2% more than the traditional PP, with only slightly more volatility.  I guess I will see.

In sum then, it all depends on how active you want to be in portfolio management and how much risk you want to take on.  I think it is acceptable to tweak the PP approach as long as you recognize and accept the associated risks.

[rickb]

I'm looking at the 43 week (301 day) SMA for SGOL (gold ETF) and I see buy and sell signals throughout 2014 and 2015. The Faber 300 day MA, as I understand, would not have helped my decision making at this present time, and gold is the most problematic component we'd like to find a solution for.


"The Faber model is to buy the S&P500 on a monthly close over the simple 10 month moving average; the sell strategy is to sell on any monthly close below the simple 10 month moving average."

Idk if this is affecting the signals or not, but I'm pretty sure you only count trading days [i.e., not weekends and holidays]. Thus, with a typical 5 day trading week, the 43 week SMA is roughly equivalent to the 215 day SMA [not 301 as you stated], but not exact. A monthly SMA actually moves slower than a weekly of the same length, which in turn moves slower than a daily. You can see this by looking at a sharpchart at stockcharts.com of a security that is close to the SMA and changing the view from daily with a 200 day SMA to weekly with a 40 week SMA.

Faber actually advocates using a 10-month monthly SMA, trading in/out at most once a month on whatever day of the month you pick as your "evaluation" day.  If you use (say) the first of the month as your evaluation day, on that day you compute a new monthly SMA using the price as of the most recent 10 firsts of the month and sell/buy based on the current price relative to this SMA.  The consequence of this is that if the price collapses on the 2nd of the month and then keeps going down you don't sell until nearly an entire month of losses.  You evaluate the signal and then act accordingly only once a month.

[ochotona]

I did a quick test on the GLD ETF, testing from the 2005 price trough to 4/1/2015 (bull/bear), and the 2011 peak to 4/15/2015 (only bear), and trading as described did not improve either situation. GLD / IAU / SGOL is the one I want to fix.

I really want to find a gold solution as opposed to a long Treasuries solution (I know many people are terrified at the end of the long Treasuries bull market), but remember, with long Treasuries you still get a coupon, and you are still promised your principal back. As interests rise, the bond resale price falls only to compensate for the better coupon rates on new issues of Treasuries. With gold, you have no coupon, no promised return of your nominal principal. With gold, price is not only the most important thing, it's the only thing.

[Libertarian666]

HB explained in detail why this sort of thing is almost guaranteed not to work, in "Why the Best-Laid Investment Plans Usually Go Wrong: And How You Can Find Safety and Profit in an Uncertain World". Very briefly, if it WOULD work, people would front-run it until it didn't work.

[MachineGhost]

HB explained in detail why this sort of thing is almost guaranteed not to work, in "Why the Best-Laid Investment Plans Usually Go Wrong: And How You Can Find Safety and Profit in an Uncertain World". Very briefly, if it WOULD work, people would front-run it until it didn't work.

HB was not a guru or anything; as with other Libertards, he's been wrong about some things including viewing people as Homo Economicus.  Trendfollowing does work in terms of reducing risk but 99% of people screw it up because their emotions fully get in the way, hence it "doesn't work".  If roboadvisors started to offer it as a feature, then there would be something to talk and worry about.

Markets or exchanges cannot exist without these emotional people.