Permanent Portfolio Using Relative Strength (SHY, TLT, GLD, VTI)

[Odysseusa]

Permanent Portfolio Using Relative Strength (SHY, TLT, GLD, VTI)



Current Relative Strength

GLD 97.24
TLT 95.86
SHY 75.50
VTI 47.89



Source: www.etfscreen.com

[MediumTex]

Can you translate please?

I don't speak Relative Strength.

I am of the PP Tribe.

Our world is more black and white, and strength is always absolute.

[rickb]

Can you translate please?

I don't speak Relative Strength.

The numbers are etftrend's RSf, see their explanation here (the Wikipedia explanation is a little more illuminating).

I don't have the foggiest idea what one would do with these numbers in the context of the PP.  Perhaps use them as rebalancing triggers, i.e. rebalance if any are over 70 ("overbought") or under 30 ("oversold")?

Of course, this boils down to chart voodoo.  I think I prefer to keep my investments and my voodoo separate - although I do keep trying to stick a golden pin in a JP Morgan doll, but the damn thing keeps grabbing the pin and putting it in its pocket.

[Odysseusa]

ChArT VoDoO


That's funny. 

[doug6zj9]

Can you translate please?

I don't speak Relative Strength.

I am of the PP Tribe.

Our world is more black and white, and strength is always absolute.

LMAO... this deserves a bump.

Still waiting for the answer though??

[Drewskers]

Man, this thread is really illuminating. A bunch of guys that are tripping all over themselves to be the first make fun of what they don't (by their own admission) understand, rather than making an effort to to understand it and THEN come up with intelligent and reasoned criticisms.

Reminds me of church. Yer drinkin' Kool Aid and don't even know it.

[MediumTex]

Man, this thread is really illuminating. A bunch of guys that are tripping all over themselves to be the first make fun of what they don't understand, rather than making an effort to to understand it and THEN come up with intelligent and reasoned criticisms.

Reminds me of church. Yer drinkin' Kool Aid and don't even know it.

If someone wants to use relative strength in putting together an investment strategy that's cool with me.

It's just not a permanent portfolio then.  It's something else.

I think that's all the tribe is saying.

[Drewskers]

Boy-howdy! I guess that's a perfectly good reason to make fun of an idea that Harry B. probably never even heard of.

As an example of Relative Strength can do with the PP allocation, here's a link to free backtest of the PP using a TOP 1 RS strategy since 2006. YES, volatility is much higher than the straight PP, but it's still lower than the S&P 500, and the growth of capital is much higher! And it's really not much harder than doing standard re-balancing of the PP. ONCE YOU STUDY IT AND UNDERSTAND IT!

http://www.etfreplay.com/backtest_rs.aspx

Are you all not even open to discussing modifications? Is the PP THAT cast in stone in your minds? You may say it is not the PP any longer, but you'll be hard pressed to come up with an allocation that worked as well with the RS strategy as it did with the PP allocation. Standard back-testing caveats apply - just as they do when back-testing the straight HBPP!

[MediumTex]

Boy-howdy! I guess that's a perfectly good reason to make fun of an idea that Harry B. probably never even heard of.

As an example of Relative Strength can do with the PP allocation, here's a link to free backtest of the PP using a TOP 1 RS strategy since 2006. YES, volatility is much higher than the straight PP, but it's still lower than the S&P 500, and the growth of capital is much higher! And it's really not much harder than doing standard re-balancing of the PP. ONCE YOU STUDY IT AND UNDERSTAND IT!

http://www.etfreplay.com/backtest_rs.aspx

Are you all not even open to discussing modifications? Is the PP THAT cast in stone in your minds? You may say it is not the PP any longer, but you'll be hard pressed to come up with an allocation that worked as well with the RS strategy as it did with the PP allocation. Standard back-testing caveats apply - just as they do when back-testing the straight HBPP!

I don't really think anyone is making fun of anything.  I was just pointing out that if you change a strategy that is called the "permanent" portfolio you are now dealing with something else.

The whole idea with the permanent portfolio is to extract oneself from the need to understand concepts like relative strength.  The permanent portfolio works, in part, because it is simple.  When you start tinkering with it it's hard to know when to stop.

It looks like this relative strength approach might work great for some people, and I appreciate you sharing the performance information.

Since "permanent portfolio" is already taken, maybe we could call this relative strength approach the "strong portfolio."

[Gumby]

Boy-howdy! I guess that's a perfectly good reason to make fun of an idea that Harry B. probably never even heard of.

In Chapter 8 of his 1987 best-selling book, Why The Best-Laid Investment Plans Usually Go Wrong, Harry Browne discusses the problems with using Technical Analysis. He wrote the following passage on Relative Strength:

Relative Strength

Another favorite technical concept is relative strength.
 A technician compares an investment with similar investments — such as other stocks in the same industry group. He wants to see whether the investment is rising faster or slower than its peers (or falling slower or faster than its peers). If it seems to be doing better than its fellows, the investment possesses relative strength and is considered a candidate for purchase.
 Industry or commodity groups also are ranked against one another for relative strength.
 A relative strength study is an excellent way to discover which investments you should have bought last month, but I've seen no evidence that it foretells which investments will do well next month.
Source: Why The Best-Laid Investment Plans Usually Go Wrong, by Harry Browne, Page 133

[clacy]

First, I don't think MT was trying to make fun of RS.  Keep in mind this is a PP message board.  With that said, there are several threads in this forum that deal with variations of the PP. 

I actually do use RS, but I don't believe it's magical or infallible.  I think momentum strategies (RS) will out perform half of the time and mean reversion (HBPP) will out perform some times.

Frankly, in my testing, using monthly moving averages is just as good as RS.  Either way, you're choosing to invest in the assets that have the most momentum. 

I am aiming for roughly half of my assets in an RS strategy and the other half in the HBPP (mean reversion).

[Drewskers]

Boy-howdy! I guess that's a perfectly good reason to make fun of an idea that Harry B. probably never even heard of.

In Chapter 8 of his 1987 best-selling book, Why The Best-Laid Investment Plans Usually Go Wrong, Harry Browne discusses the problems with using Technical Analysis. He wrote the following passage on Relative Strength:

Relative Strength

Another favorite technical concept is relative strength.
 A technician compares an investment with similar investments — such as other stocks in the same industry group. He wants to see whether the investment is rising faster or slower than its peers (or falling slower or faster than its peers). If it seems to be doing better than its fellows, the investment possesses relative strength and is considered a candidate for purchase.
 Industry or commodity groups also are ranked against one another for relative strength.
 A relative strength study is an excellent way to discover which investments you should have bought last month, but I've seen no evidence that it foretells which investments will do well next month.
Source: Why The Best-Laid Investment Plans Usually Go Wrong, by Harry Browne, Page 133

RIGHT - and the RS strategy posed by the OP of this thread compared four DIFFERENT (not SIMILAR) investments. It's not the same thing.

[Gumby]

Boy-howdy! I guess that's a perfectly good reason to make fun of an idea that Harry B. probably never even heard of.

In Chapter 8 of his 1987 best-selling book, Why The Best-Laid Investment Plans Usually Go Wrong, Harry Browne discusses the problems with using Technical Analysis. He wrote the following passage on Relative Strength:

Relative Strength

Another favorite technical concept is relative strength.
 A technician compares an investment with similar investments — such as other stocks in the same industry group. He wants to see whether the investment is rising faster or slower than its peers (or falling slower or faster than its peers). If it seems to be doing better than its fellows, the investment possesses relative strength and is considered a candidate for purchase.
 Industry or commodity groups also are ranked against one another for relative strength.
 A relative strength study is an excellent way to discover which investments you should have bought last month, but I've seen no evidence that it foretells which investments will do well next month.
Source: Why The Best-Laid Investment Plans Usually Go Wrong, by Harry Browne, Page 133

RIGHT - and the RS strategy posed by the OP of this thread compared four DIFFERENT (not SIMILAR) investments. It's not the same thing.

I know it seems like we are being obtuse, but the truth is that we've already looked into it on this board. Clive did extensive testing into RS last year (unfortunately, he usually deletes his older comments). As impressive as the backtesting was — and, yes, the charts were very impressive — many people here would rather have a slower growing, low-volatility, portfolio than the portfolio you are describing. Browne felt that investors were more likely to stick to an investment plan that had less volatility and slower growth than one that had better returns with more volatility. I think most PP holders agree with that sentiment.

It probably wasn't that hard to beat the Permanent Portfolio over the long run with an investment strategy that took on more risk. But, I doubt most average investors have the stomach for those portfolios when the world seems like it's falling apart at the seams.

I believe Clive discovered that there were a few odd years where you would have gotten hurt by RS, but over the long run it did very well.

It's all very interesting, and I encourage you to keep discussing it. But you'll have to excuse us if some of us feel like we've already seen this fad here before. We'll try to keep quiet.

[Drewskers]

First, I don't think MT was trying to make fun of RS.  Keep in mind this is a PP message board.  With that said, there are several threads in this forum that deal with variations of the PP. 

I actually do use RS, but I don't believe it's magical or infallible.  I think momentum strategies (RS) will out perform half of the time and mean reversion (HBPP) will out perform some times.

Frankly, in my testing, using monthly moving averages is just as good as RS.  Either way, you're choosing to invest in the assets that have the most momentum. 

I am aiming for roughly half of my assets in an RS strategy and the other half in the HBPP (mean reversion).

I didn't say MT was making fun of RS. I said the the thread (as in, the general tone of the thread), was making fun of RS. You may not agree with my characterization of "making fun" - but you really can't disagree that there weren't any posts considering the merits of the idea, and there was some joking about it. What's that called, if not "making fun"?

If there is someplace on this board where such ideas as applying RS to the PP allocation are welcome and open for discussion - I suggest re-directing posts such as this to that area of the board, so it can be considered and debated with an open mindset.

[Gumby]

If there is someplace on this board where such ideas as applying RS to the PP allocation are welcome and open for discussion - I suggest re-directing posts such as this to that area of the board, so it can be considered and debated with an open mindset.

As I said... it's been discussed before (though, for some reason it wasn't placed in the VP area of the site):

http://www.gyroscopicinvesting.com/foru ... ic.php?t=1

But, you'll have to ask Clive to repost his RSPP data (since he deleted it, along with all of his subsequent replies).

[moda0306]

Drewskers,

We've talked about RS a lot... just not recently.

Most people that don't like it weren't being obtuse or anything towards the ones discussing it.

[clacy]

I didn't say MT was making fun of RS. I said the the thread (as in, the general tone of the thread), was making fun of RS. You may not agree with my characterization of "making fun" - but you really can't disagree that there weren't any posts considering the merits of the idea, and there was some joking about it. What's that called, if not "making fun"?

If there is someplace on this board where such ideas as applying RS to the PP allocation are welcome and open for discussion - I suggest re-directing posts such as this to that area of the board, so it can be considered and debated with an open mindset.

Fair enough.  Maybe we should all move on then and discuss the merits of RS/momentum.  Please feel free to open the discussion as you wish.  I will be more than interested.  Also, please search for past RS discussions. I do not specifically remember where they are, but I know I've read a couple.  Unfortunately Clive has erased much of his past work, but I'm sure there are more recent posts of his that you will find interesting.

[Gumby]

Pro gamblers typically have great money management skills and great patience - and will wait for where the odds look highly favourable whilst never letting losses run away from their control.

That's an excellent observation. I know a few "smart" gamblers who've managed to do very well in the market over the long term (somehow) with very risky strategies. I'm sure there luck will run dry someday, but so far it hasn't. I happen to be a terrible gambler.

[stone]

I'm fairly new to this site too and so missed all the previous momentum discussion. That Harry Browne quote does miss out on a well established empirical fact in that a very wide variety of assets have been shown to do worse in the month following a previous down month than they do at randomly chosen time points. So momentum does have an empirical basis. If the four PP assets were reviewed each month and the one that did best the previous month got allocated 40%, second best 30%, third best 20% and worst 10% (eg 40%gold:30%LTT:20%cash:10%stocks or whatever), would that have made the PP more or less volatile or given more or less growth? My guess would be that it might work better than the standard PP ....BUT the trading costs would counteract the better capture of momentum.

I think such an approach would be a much less hazardous way to capture momentum effects than using a stop loss aproach is. Unlike the stop loss method, it requires no tailoring of the strategy to the volatility levels.

[Drewskers]

I don't have a lot of time to post on the topic right now but here is a list of papers readily found (via Google) that discuss momentum investing using relative strength in great detail. They are worth printing out and studying closely if one has an interest in this technique.

My personal conclusion (based on a relatively low risk tolerance) is that any application of RS momentum techniques will be confined to a small portion of my variable portfolio, and it will be used to select ETFs within a class I have already decided to invest in (for instance, emerging market ETFs).

The Case for Momentum Investing by AQR Capital Management

Relative Strength Strategies for Investing by Mebane Faber, Cambria Investment Management (essentially the same material is contained in Mebane's book The Ivy Portfolio)

Momentum Investing - Finally Accessible for Individual Investors by Tobias Moskowitz

Momentum – A Contrarian Case for Following the Herd by Tom Hancock, GMO LLC (very good critical analysis that closes, in part, with this assessment, "... momentum is and always will be a very uncomfortable strategy to run. When it breaks, one is left without special hope of getting additional return, and one is forced to justify a strategy that on the surface of it sounds rather naïve ... While the average outperformance is significant, it comes at the cost of occasional large drawdowns that can be very injurious to a professional money manager.")

Time Series Momentum by Tobias Moskowitz, Yao Hua Ooi, Lasse H. Pedersen (a very technical paper but the abstract is easily understandable: "We document significant "time series momentum" in equity index, currency, commodity, and bond futures for each of the 58 liquid instruments we consider. We find persistence in returns for 1 to 12 months that partially reverses over longer horizons, consistent with sentiment theories of initial under-reaction and delayed over-reaction. A diversified portfolio of time series momentum strategies across all asset classes delivers substantial abnormal returns with little exposure to standard asset pricing factors, and performs best during extreme markets. We show that the returns to time series momentum are closely linked to the trading activities of speculators and hedgers, where speculators appear to profit from it at the expense of hedgers.")

[AdamA]

I don't have a lot of time to post on the topic right now but here is a list of papers readily found (via Google) that discuss momentum investing using relative strength in great detail. They are worth printing out and studying closely if one has an interest in this technique.

My personal conclusion (based on a relatively low risk tolerance) is that any application of RS momentum techniques will be confined to a small portion of my variable portfolio, and it will be used to select ETFs within a class I have already decided to invest in (for instance, emerging market ETFs).

The Case for Momentum Investing by AQR Capital Management

Relative Strength Strategies for Investing by Mebane Faber, Cambria Investment Management (essentially the same material is contained in Mebane's book The Ivy Portfolio)

Momentum Investing - Finally Accessible for Individual Investors by Tobias Moskowitz

Momentum – A Contrarian Case for Following the Herd by Tom Hancock, GMO LLC (very good critical analysis that closes, in part, with this assessment, "... momentum is and always will be a very uncomfortable strategy to run. When it breaks, one is left without special hope of getting additional return, and one is forced to justify a strategy that on the surface of it sounds rather naïve ... While the average outperformance is significant, it comes at the cost of occasional large drawdowns that can be very injurious to a professional money manager.")

Time Series Momentum by Tobias Moskowitz, Yao Hua Ooi, Lasse H. Pedersen (a very technical paper but the abstract is easily understandable: "We document significant "time series momentum" in equity index, currency, commodity, and bond futures for each of the 58 liquid instruments we consider. We find persistence in returns for 1 to 12 months that partially reverses over longer horizons, consistent with sentiment theories of initial under-reaction and delayed over-reaction. A diversified portfolio of time series momentum strategies across all asset classes delivers substantial abnormal returns with little exposure to standard asset pricing factors, and performs best during extreme markets. We show that the returns to time series momentum are closely linked to the trading activities of speculators and hedgers, where speculators appear to profit from it at the expense of hedgers.")

Rule #6: No trading system will work as well in the future as it did in the past.

[Drewskers]

Relative strength, as we are discussing it, and as analyzed in the papers I cited, is not a "trading system". It is a technique to manage asset allocations within an investment portfolio, and to capitalize on (and protect against) market inefficiencies.

If you think about it for a while, that's exactly what re-balancing aims to accomplish, albeit in a much more conservative and reliable manner.

Who's to say re-balancing will always work?

[clacy]

I don't have a lot of time to post on the topic right now but here is a list of papers readily found (via Google) that discuss momentum investing using relative strength in great detail. They are worth printing out and studying closely if one has an interest in this technique.

My personal conclusion (based on a relatively low risk tolerance) is that any application of RS momentum techniques will be confined to a small portion of my variable portfolio, and it will be used to select ETFs within a class I have already decided to invest in (for instance, emerging market ETFs).

The Case for Momentum Investing by AQR Capital Management

Relative Strength Strategies for Investing by Mebane Faber, Cambria Investment Management (essentially the same material is contained in Mebane's book The Ivy Portfolio)

Momentum Investing - Finally Accessible for Individual Investors by Tobias Moskowitz

Momentum – A Contrarian Case for Following the Herd by Tom Hancock, GMO LLC (very good critical analysis that closes, in part, with this assessment, "... momentum is and always will be a very uncomfortable strategy to run. When it breaks, one is left without special hope of getting additional return, and one is forced to justify a strategy that on the surface of it sounds rather naïve ... While the average outperformance is significant, it comes at the cost of occasional large drawdowns that can be very injurious to a professional money manager.")

Time Series Momentum by Tobias Moskowitz, Yao Hua Ooi, Lasse H. Pedersen (a very technical paper but the abstract is easily understandable: "We document significant "time series momentum" in equity index, currency, commodity, and bond futures for each of the 58 liquid instruments we consider. We find persistence in returns for 1 to 12 months that partially reverses over longer horizons, consistent with sentiment theories of initial under-reaction and delayed over-reaction. A diversified portfolio of time series momentum strategies across all asset classes delivers substantial abnormal returns with little exposure to standard asset pricing factors, and performs best during extreme markets. We show that the returns to time series momentum are closely linked to the trading activities of speculators and hedgers, where speculators appear to profit from it at the expense of hedgers.")

Rule #6: No trading system will work as well in the future as it did in the past.

I don't see how using an RS system to allocate is a lot different Harry Browne's PP.  I do both, because one is momentum based, and the other is a mean reversion method.

[Drewskers]

Actually, when it comes down to it - I might was well say it now, rebalancing doesn't always work!

There are some specific examples given here:

http://www.etfreplay.com/blog/post/2011 ... ances.aspx

(Oh crap - there goes another sacred cow ...)

[Drewskers]

I don't see how using an RS system to allocate is a lot different Harry Browne's PP.  I do both, because one is momentum based, and the other is a mean reversion method.

EXACTLY.