Gyroscopic Investing

PPers/VPers,

I would like to emphasize that I do not use all my money for this strategy. Instead I only use a portion of it.
For example, if I have $100,000 portfolio, I only use $10,000 to $20,000 for this VP strategy and $80,000 for the PP.
For this VP momentum strategy, please use a stop loss of 7% or 8% to give yourself more chances of winning.

Current Relative Strength


SPY 68
GLD 49
TLT 96
SHY 73


source:
www.ETFscreen.com

Trading Diary

TMV, the opposite of TMF, goes from $85 to below $50 in less than 3 months.
Therefore, please make sure you use a stop-loss of 7% to 8% to get out in case it does not work out.

Odysseusa wrote: Therefore, please make sure you use a stop-loss of 7% to 8% to get out in case it does not work out.

Why 7-8%?  Why not 8-9%?  15-20%?

With 7% to 8% stop-loss, you can afford a few losing bets on your trading decision.

Trading Diary


My stop-loss got executed around $8,200 for 100 TMF.

I bought 100 TMF for $7,500; it went as high as $8,900.


When it went as high as $8,900; I put in a stop-loss at $82.


I should have sold it at $8,900 for a profit of $1,400; instead of $700.

Odysseusa wrote: Trading Diary


My stop-loss got executed around $8,200 for 100 TMF.

I bought 100 TMF for $7,500; it went as high as $8,900.


When it went as high as $8,900; I put in a stop-loss at $82.


I should have sold it at $8,900 for a profit of $1,400; instead of $700.

Yes, but how were you to know that $8900 was the top?  Good thing you moved up your stop loss and came out ahead.  I'd call it a successful speculation, as you didn't lose money and instead actually made a bit.

Thanks hoost... I set aside $10k to follow this method....will keep you and others updated...

Why not use Clive's 3x leveraged ETF approach for this strategy? 

Odysseusa wrote: Trading Diary


My stop-loss got executed around $8,200 for 100 TMF.

I bought 100 TMF for $7,500; it went as high as $8,900.


When it went as high as $8,900; I put in a stop-loss at $82.


I should have sold it at $8,900 for a profit of $1,400; instead of $700.

What did the PP make over the same time period?

Did you have to pay anything in taxes/fees?

I set up around $10K for this strategy (Variable Portfolio)
and aims to get 25%+ return each year.
I may fail in this regard but I want to give it a try.
I also have $100K+ in Permanent Portfolio just in case.

Clive wrote: Holding 8.3% in each of 3x stocks (BGU), 3x gold (UGLD) and 3x LTT (TMF) rebalanced once yearly, will generally replicate a PP providing 50% of the remainder 75% of funds achieves a return that matches the cost of borrowing (typically LIBOR - which is generally much the same as the yield on 18 month treasury's).

With that arrangement you are only exposed to 25% in ETF's (the costs for those ETF's are higher but as you only hold relatively small amounts it generally scales down those costs relative to the whole).

If the 75% held in 'cash' is deployed elsewhere and achieves reasonable rewards, that adds to overall value/rewards (equally however if they perform badly then you lose out overall).

10% in a variable portfolio, 90% in a PP, if the PP makes say 10% and the variable portfolio makes 20% = 11% overall reward. In contrast if the above has 75% cash achieving 4% above cash rates of return then the total reward will be around 13%. Its perhaps easier to achieve a 4% higher reward than cash than it is to consistently achieve a 20% variable portfolio return.

Some very good insights here.  Playing with stop-loss momentum investing is a bit like picking up nickels in front of a steamroller, except the tax man keeps 2 cents of every one you actually pick up.

Clive wrote: Holding 8.3% in each of 3x stocks (BGU), 3x gold (UGLD) and 3x LTT (TMF) rebalanced once yearly, will generally replicate a PP providing 50% of the remainder 75% of funds achieves a return that matches the cost of borrowing (typically LIBOR - which is generally much the same as the yield on 18 month treasury's).

With that arrangement you are only exposed to 25% in ETF's (the costs for those ETF's are higher but as you only hold relatively small amounts it generally scales down those costs relative to the whole).

If the 75% held in 'cash' is deployed elsewhere and achieves reasonable rewards, that adds to overall value/rewards (equally however if they perform badly then you lose out overall).

My brain's a little fuzzy tonight.  Are you saying that if 25% held in non-cash asset, leveraged ETF's were to go to zero, you would wind up with more net capital than with the regular HBPP if 75% of the non-cash assets went to zero?

Be aware of leveraged ETFs. They are ONLY for short term trading

http://seekingalpha.com/article/286027- ... raged-etfs

If a non leveraged ETF lose a 10%, it needs a 11% to recover, but if you use a leveraged ETF you lose 2x10% and need a 25% to recover, that is a 3% more than 2x11%.

So, leveraged ETFs don´t allow volatility, yo need to get only the straight forward move. Pretty hard in my opinion.

And thanks for this link: http://www.naaim.org/wp-content/uploads ... onacci.pdf

really nice

one thought about momentum, emerging markets have a 15+% return in the long run, I think that is a good idea look for momentum on emerging countries ETFs

Clive, aren't these effects magnified by further increases in leverage.  For example one could buy 3 month ITM options at roughly 9x leverage.  This means you'd only need to hold 3% GLD, 3% SPY, 3% TLT (although I don't think TLT is necessary since we can simply hold bonds with an average duration of ~7 years and get the same effect as the cash/LLT barbell (as you have discussed before)).  The ITM options will become worthless with a 10% drop in the underlying ETF over the three month period.  But the beauty here is that the maximum drawdown over the three month period is the 3% placed in the option.  So if GLD fell 30% during a three month period then the options portfolio would only see a 3% loss, while the standard 1xPP would see a 7.5% loss (30%*0.25).

Plenty of downside protection, while the upside remains unlimited.

Clive wrote:

For example one could buy 3 month ITM options at roughly 9x leverage.  This means you'd only need to hold 3% GLD, 3% SPY

NO! Buying a stock option for 3% for 3 months = 12% yearly overhead if bought at the money and the share price moves sideways over the 3 months. Scale that up to also include gold options = 24% combined yearly overhead, and repeated rolling/flat period could be crippling.

Right, but I want to buy in-the-money (ITM) at roughly a 0.85 delta, which on average means the strike price will be ~10% below the current stock price.  Buying ITM provides much greater protection since even if the ETF falls 3-4% then you still receive 50% of your option back.  It also protects from flat markets since you will receive ~90% of the option back.

I agree that buying ATM is not wise, since flat markets will slaughter you, but ITM helps reduce this risk (at the cost of lowering the leverage from ~13x down to ~9x).

Also, for the option to lose 12% over the entire year means that GLD needs to fall at least 10% over every three month period (not on average).  If it falls more than 10% in one of those periods then the ITM options will be the winner, or at least break-even with the 1xPP.

Clive wrote: Options incorporate price elements for how much the option is in the money, a time value (cost of borrowing) and a volatility premium. To use options you'd have to more or less constantly rebalance perhaps on a daily basis to maintain a constant 2, 3, ... 9 x type leverage effect in a similar manner to how leveraged ETF's rebalance daily and the costs would be very high unless you were investing perhaps $10m+ amounts (wild guess).

Volatility can be high and Options are a common choice to focus in on that volatility class. You'd be jumping into a totally different pool - and one that contained some pretty nasty sharks.

But for a buy-and-hold strategy (ie constantly roll-over options every three months), volatility becomes a non-issue since over the long haul it is neutral.  The only problem I can think of is during a large sell off where the options become worthless and you have to buy a new three month set, the implied volatility would be through the roof, so it might make sense to switch to 3x LETF's until things calm back down.

I don't believe that daily rebalancing is necessarily the best method for controlling the leverage.  I think that every three months may be enough.  I'm just guessing though.

There are several downsides to using options:
- taxes
- transaction costs
- temptation to time the market
- implied volatility after options expire worthless

Clive wrote: If 6 months into the year the underlying share price collapsed to zero, the 3x based approach would have lost -$3333 (still have $6667 in SHY) whilst the 1x investor would have lost -$10,000

My gut feel is there is no free lunch in the markets.  What is likely to happen is the tracking error between the leveraged ETF and the underlying will compensate for losing less with a leveraged portfolio than a standard portfolio.  I'd love to be proven wrong, however.  Futures have contango or backwardation issues.  Options can be cheap or expensive depending on the implied volatility.  To minimize such tracking error, turnover must be minimized and long-term 2-3 year LEAPs offer only 2x leverage deep ITM.  That might be enough leverage for use in a portfolio but typically is not for trading.

Before Merrill Lynch went belly up, they offered guaranteed principal-protected securities.  They would take your money, 90% into zero coupon bonds and 10% into the underlying index security.  The maturity date of the zero coupon bonds would match the target date.