Tactical Asset Allocation + HBPP an intriguing combo

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Kbg
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Re: Tactical Asset Allocation + HBPP an intriguing combo

Post by Kbg » Wed Feb 06, 2019 8:34 am

ochotona wrote:
Wed Feb 06, 2019 7:01 am
More fussing, and going back to Occam's Razor. The GEM with 4 6 8 10 12 month lookbacks, "normalized" (annualized) weights works great, but didn't catch December 2018. But to catch December 2018 you have to heavily-weight 4 months, which to me seems like over-tuning the model to solve just one problem, which might break something else.
You are going down a dark alley there my friend. I recommend you turn around as you have accurately diagnosed the problem. I think it best to simply understand the differences in lookback length and what that means for the system. Academically, anything between 3-12 months "works." And exactly none of us know what is going to work best in the future. It's a futile exercise. But here's what we do know:

1. The longer the MA or lookback, the longer the lag and the more draw down, when it happens, you are going to get
2. Longer terms yield fewer trades (corollary...and fewer taxable events)
3. Longer terms better exploit major market moves and are less prone to whipsaw (though, under the right conditions they can be just as bad as ST lookbacks. For example, times when the market action is right around the 200 day MA or one year lookback)

Now take the inverse of the above and that is what shorter terms provide.

One can take two approaches in implementation. Averaging various look backs and weighting the look back values, which at the end of the day puts one in the mid range of whatever you averaged with some smoothing and/or tilts the single computation to take on the characteristics of LT or ST lookbacks.

My personal approach is to take two distinct look backs (one ST and one LT) and trade 50% of the portfolio based on them separately. This way I know I'm going to get one that provides good diversification from the other with different characteristics. In a nice bull run, the LT is going to crush the ST. After the market has tubed, the ST is going to crush the LT. Averaging/weighting/segmenting are all valid approaches...and exactly none of us know which is going to to best going forward.

Now with regard to December...no momentum system is going to prevent that unless it is very short term in nature. Just plan on eating hard short term spikes down (or up). The hope with a LT system is that things like that are in the noise and you stay long through the recovery. Assuming the recovery continues the ST system if it exited will get back in much faster and enjoy some of the snap back. Point being, there is no perfection, only trade offs.
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Re: Tactical Asset Allocation + HBPP an intriguing combo

Post by ochotona » Wed Feb 06, 2019 1:18 pm

Oh I see. Multiple look backs traded separately so you get STEPS in allocation, not just binary. Got it. But it must be closely related mathematically to multiple look back scores, scores compiled, then one trade decision. Thanks for the thought.
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Re: Tactical Asset Allocation + HBPP an intriguing combo

Post by Kbg » Wed Feb 06, 2019 2:20 pm

ochotona wrote:
Wed Feb 06, 2019 1:18 pm
Oh I see. Multiple look backs traded separately so you get STEPS in allocation, not just binary. Got it. But it must be closely related mathematically to multiple look back scores, scores compiled, then one trade decision. Thanks for the thought.
Maybe it yields the same end portfolio results, I doubt it, but I've never done that study either. However, at the signal level no way. A 3 month signal and a 12 month signal traded separately do not yield the same trades as a single month stand alone signal. The market path from 3 to 7.5mo and 7.5-12mo could be completely different.

If you want a quick demo...go to PV, run VFINX at 2, 7, 12 mo periods and look at the results. Also look at annual returns for the years 1987, 2003 and 2009. Then pick some years where there were nice bull runs. You will see the performance profile differences.

If you want to do that study of if it all averages out, feel free to. It would be interesting.
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Re: Tactical Asset Allocation + HBPP an intriguing combo

Post by ochotona » Wed Feb 06, 2019 8:22 pm

Kbg wrote:
Wed Feb 06, 2019 2:20 pm
ochotona wrote:
Wed Feb 06, 2019 1:18 pm
Oh I see. Multiple look backs traded separately so you get STEPS in allocation, not just binary. Got it. But it must be closely related mathematically to multiple look back scores, scores compiled, then one trade decision. Thanks for the thought.
Maybe it yields the same end portfolio results, I doubt it, but I've never done that study either. However, at the signal level no way. A 3 month signal and a 12 month signal traded separately do not yield the same trades as a single month stand alone signal. The market path from 3 to 7.5mo and 7.5-12mo could be completely different.

If you want a quick demo...go to PV, run VFINX at 2, 7, 12 mo periods and look at the results. Also look at annual returns for the years 1987, 2003 and 2009. Then pick some years where there were nice bull runs. You will see the performance profile differences.

If you want to do that study of if it all averages out, feel free to. It would be interesting.
It's worth doing... It's on my list
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Re: Tactical Asset Allocation + HBPP an intriguing combo

Post by ochotona » Fri Feb 08, 2019 6:58 pm

So I tested the GEM with 4 6 8 10 12 month lookbacks contributing to the signal, equal weights, normalized per Portfolio Visualizer, CAGR 11.48% from 1998-2018.

If you trade five separate tranches at the end of each month, 4 6 8 10 12 months, then you give up about 1% in return. And I don't have a way to rebalance in the software.

Yes, it's counter-intuitive.
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Re: Tactical Asset Allocation + HBPP an intriguing combo

Post by InsuranceGuy » Fri Feb 08, 2019 7:04 pm

ochotona wrote:
Fri Feb 08, 2019 6:58 pm
So I tested the GEM with 4 6 8 10 12 month lookbacks contributing to the signal, equal weights, normalized per Portfolio Visualizer, CAGR 11.48% from 1998-2018.

If you trade five separate tranches at the end of each month, 4 6 8 10 12 months, then you give up about 1% in return. And I don't have a way to rebalance in the software.

Yes, it's counter-intuitive.
That doesn't suprise me. It makes sense you would get a better model by ensembling multiple lookbacks than you get by trading equal portions of multiple lookbacks.

Typically ensembling will improve the model while trading equal portions would simply diversify (average) over the multiple models.
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Re: Tactical Asset Allocation + HBPP an intriguing combo

Post by ochotona » Sat Feb 09, 2019 9:22 am

InsuranceGuy wrote:
Fri Feb 08, 2019 7:04 pm
ochotona wrote:
Fri Feb 08, 2019 6:58 pm
So I tested the GEM with 4 6 8 10 12 month lookbacks contributing to the signal, equal weights, normalized per Portfolio Visualizer, CAGR 11.48% from 1998-2018.

If you trade five separate tranches at the end of each month, 4 6 8 10 12 months, then you give up about 1% in return. And I don't have a way to rebalance in the software.
That doesn't suprise me. It makes sense you would get a better model by ensembling multiple lookbacks than you get by trading equal portions of multiple lookbacks.

Typically ensembling will improve the model while trading equal portions would simply diversify (average) over the multiple models.
Tell you what... I'll let you and KBG argue over that one! I'm going to drop out of that sub-thread!

Being lazy, gun-shy, and fully prone to trader's remorse as I am, now I'm circling back to looking at 12 month as a very well proven durable lookback, but "ensembling" (good word) 10 11 12 13 14 months together to cancel out short-term noise. 19 trades in 21 years. I'm down with that.

This in not a race. I don't need maximum CAGR to retire successfully or even abundantly. If I am blessed with 7% nominal from my portfolio over the next 7 years I bust my stretch goal.
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Re: Tactical Asset Allocation + HBPP an intriguing combo

Post by InsuranceGuy » Sat Feb 09, 2019 9:58 am

ochotona wrote:
Sat Feb 09, 2019 9:22 am
Being lazy, gun-shy, and fully prone to trader's remorse as I am, now I'm circling back to looking at 12 month as a very well proven durable lookback, but "ensembling" (good word) 10 11 12 13 14 months together to cancel out short-term noise. 19 trades in 21 years. I'm down with that.

This in not a race. I don't need maximum CAGR to retire successfully or even abundantly. If I am blessed with 7% nominal from my portfolio over the next 7 years I bust my stretch goal.
I think that is not a bad idea. My one recommendation is that I would shorten your lookbacks to be 9 10 11 12 13 as the 14+ month lookbacks have shown to be much less predictive as assets tend to start mean reverting the further you get out.

IG
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Re: Tactical Asset Allocation + HBPP an intriguing combo

Post by Kbg » Sat Feb 09, 2019 10:06 am

I’m dropping out as well as there isn’t much to add to what has been said. I’ll summarize what the key points are from my view:

We don’t know what is going to work best going forward.

The various methods behave differently.

Averaging leaves a single signal, using different lengths provides the number of signals equal to the number of lookbacks you choose.
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Re: Tactical Asset Allocation + HBPP an intriguing combo

Post by ochotona » Sat Feb 09, 2019 10:19 am

InsuranceGuy wrote:
Sat Feb 09, 2019 9:58 am
I think that is not a bad idea. My one recommendation is that I would shorten your lookbacks to be 9 10 11 12 13 as the 14+ month lookbacks have shown to be much less predictive as assets tend to start mean reverting the further you get out.
Agreed. Done.

GEM 10 11 12 13 vs GEM 12

CAGR 11.36% vs 10.13% much improved
Maximum Drawdown -17.63% vs -19.70% much improved
Sortino Ratio 1.26% vs 1.07% improved
Number of Trades Per Year 1 vs 1.1 mildly improved, yipee, more laziness
Number of stupid, pointless one and two month long positions 3 vs 7 much improved, yipee, less regret

I'll report GEM 10 11 12 13 on March 1.

PS - I have been doing this already manually, in that I have been looking at 11 and 10 month lookbacks, checking for potential whipsaws due to price volatility.
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Re: Tactical Asset Allocation + HBPP an intriguing combo

Post by Kbg » Mon Feb 11, 2019 8:55 am

I spent some time reading several blog posts from thinknewfound...I highly recommend looking at their craftsmanship posts.
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Re: Tactical Asset Allocation + HBPP an intriguing combo

Post by Kbg » Sat Feb 16, 2019 12:37 pm

I decided to dig into this a bit. Note the mutual funds are not the same as the traditional GEM. What I was trying to get at was how the various momentum look backs perform comparatively. Look backs are 3/6/12 months and always weighted .34/.33/.33 respectively. In columns J & K, J is weighted by lookback length and K is weighted by % of portfolio dedicated to that lookback traded independently. So when adding up the annual return of column K that is simply the sum of columns G*.34/H*.33/I*.33. The bottom row is the cumulative return and column M is if column J exceeded column k (which it did 13 out of 23 times. (I did not count 2019). Columns N and O are what 10K grew to.

https://www.dropbox.com/s/01491e5fq4rn2 ... 3.PNG?dl=0

I then performed a rolling 5 year summation of annual returns which I think is highly informative. You will note a couple of things. 1) Which single lookback is best clearly changes over time. 2) Equal weighted lookback averaging as compared to running a third each of your portfolio performs quite differently. Averaging lookbacks is clearly "streaky" when it comes to performance and tends to be correlated with the LT side of the equation whereas if you are looking for "the average" segregated is clearly the better way to go.

https://www.dropbox.com/s/lkf0but3qne94 ... 2.PNG?dl=0

Turning to behavioral finance...if you go with equal weighted lookbacks you are clearly going to have regrets when 3mo momentum is outperforming. take a look at 2009-2013. 12mo mo and equal weighted lookback massively underperformed 3mo. Can you psychologically do that for five years running. If you go with a segregated portfolio. You will have regrets every year if your bogey is the best lookback. Alternatively, you will be happy every year if your bogey is the worst lookback. Can you psychologically be "average" every single year? Additionally, one has to be extremely cautious of recency bias when looking at the data. It goes without saying that if 3 months is in the mix this portion is going to trade a lot. I looked at just the 3mo trades and they were pretty much double that of the 3/6/12 weighted option.

However, the happy news is that DM outpeformed all assets and an equal weight of all assets. So every option was "good."

My personal take: In a taxable account a good argument is to be made that anything longer term is better. However, you have to trade less than annually to take advantage of slower trading and in most years, you are going to trade at least once which means a taxable event. In a retirement account then it's probably whatever you feel good about...however, when withdrawing money from your retirement account I don't think there is any question which is superior...segregated.

I'm glad I did this. I will be acting on it as to me there is a pretty compelling story here.
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