Timing the market using moving averages - an experiment

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They follow different strategies with goal to out perform the SP500:

You can also backtest a moving average or Dual momentum strategy on PortfolioVisualizer

That would take all the fun out of it. :wink: If the purpose was not playing with building my own strategy and pitting myself against the market, I’d pay a manager to do it. :stuck_out_tongue:

Edit: also, the cut taken on the moving average to shift it down is a core part of why I’m confident in this strategy. I’ve yet to find an automated tool that allows for this parameter.

If you can shrug it off, indeed, a portfolio of broad, diversified assets and a buy and hold strategy is all you need. I think we mainly agree on that and on the concept that the optimization must not be financial only, but that freeing our mind and time for other activities is a huge plus that allows for a better life.

Time is precious. We shouldn’t waste it chasing profits.

Not everybody is an accumulator, though. The GFC (Global Financial Crisis - 2007-2008) lasted 2 years, those who lost their job during the first hit to the financial sector went out of unemployment benefits during the crisis, when finding a new job wasn’t that easy. Meanwhile, those who had available money could buy real estate on the cheap as the prices crumbled down.

For me, part of this is entertainment. Part of it is rising up to the challenge after being a bit bored of reading again and again that you can’t time the market and that even if you get your exit right, you still have to re-enter at the right point. I’m under the impression that the people having these discourses think that, in order for a market timing strategy to work, you have to exit at the exact peak and enter at the exact bottom, everytime.

That’s not my belief. For me, for it to work, you have to make it somewhat predictable and working most of the time while fully acknowledging what can happen when the timing is wrong. This experiment also aims at either affirming my belief or help me craft the belief that I can’t, indeed, time the market and that buying and holding is the best strategy for me. Tinkerers gotta tinker. I am a tinkerer, I need to experiment by myself and get burnt from time to time to learn and flourish.

By itself, I would not expect anything more out of it than reduced drawdowns. If it works, it can be paired up with lombard loans, inverse ETFs, derivatives or other kinds of funds or assets to boost the returns, in which case, I’m confident it’s possible to overperform though it’d be time consuming and probably not very scalable. It’d raise a bunch of tax issues in Switzerland, too (use of leverage, holding periods, use of derivatives, amount of returns).

It is highly dependent on the parameters chosen, which, as you note, raises a different layer of risk. I’m confident the behavior of the Extreme 95 fund is close enough to the SPI (or S&P500-like) and that their behavior shouldn’t change drastically in the near future, so I’m confident the retrofitting I’ve done should work in a relatively satisfactory fashion for the coming times. I have to stay aware and may have to adapt it if the conditions change drastically. I’m confident it’s relatively sturdy, though, we’d be speaking Bitcoin-like volativity or anti-stocks legislation for the parameters to fall completely off track, in my opinion.

Is now ten years that I looked into investing.
My realization for these kind of strategies is that they are far more difficult to keep going consistently than buy and hold. I still have to meet somebody who has kept the same moving average strategy over 10 years without fiddling around. First time there is sideways market with some sawtooth behavior they inevitably panic and start changing strategy. I’ve read uncounted thread of people reporting…and after some years and crashes they stop.

7 years ago i started simply buying VT and stopped looking at the share price, indexes whatever.
Psichologically? Way less stressful than any momentum based strategy.

Believe me, in 10 years you are not going to be following exactly the same strategy, same parameters, that you are following now. And if you are not…then it’s pointless to start :wink: because it may only works if you are exactly consistent. Which in certain situation is very stressful.

Just my 2 cents.

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Well I’m actually following a moving average strategy since around 2015 and I’m quite satisfied with it.
Manly following the approach suggested by Meb Faber in his book Ivy Portfolio and also tracked monthly by dshort site: https://www.advisorperspectives.com/dshort/updates/2021/03/31/march-moving-averages-up-4-2-from-february

Btw my rationale behind the strategy is more to reduce the max drawdowns and allow myself to be fully invested in stock knowing to have a plan B if things goes south.

Nice thread, will follow it!

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Not much to say for April. I’ve replaced the active 75 indicator for an active 95 one now that there’s one. As a reminder, this isn’t relevant to the strategies themselves but with Frankly, active strategies bear less fees and have less delays for moving funds, so if a 3 days delay to move money out and in of the passive fund ends up being too much, I may switch to the active fund.

April 2021

Since December 2020

Real Data

Mood: this market feels invincible. For a bear like me, that feels like a capitulation moment that could relate to a market top. I’m glad I’m not stuck trying to figure out what to do with it and to be invested instead.

April 2021 returns (all strategies): 2.61%
April 2021 max drawdown (all strategies): -1.3%

All time compound monthly returns (all strategies): 2.5% (annualized: 33.5%)
All time max drawdown (all strategies): -3.3% (January 21 to February 1st 2021)

YTD total returns (all strategies): 10.12%
YTD max drawdown (all strategies): -3.3% (January 21 to February 1st)

We’re already 1/3rd of the year down the road and still on track for a 30%+ returns year. I’m starting to think we’ll make it (which is, of course, dangerous thinking: there’s still a lot that can happen).

Can you post a log scale, time weighted return performance chart vs. your benchmark (which would be B&H of the same funds I guess)?

Just to make sure I do it properly, what are you wanting to be displayed?

My benchmark is the “Swisscanto (CH) Vorsorge Fonds 95 Passiv -VT CHF-” fund/share class.

The strategies haven’t yet triggered and all I’ve done so far is invest in that fund for a few months. The differences in returns come from:

  • The fixed management fees of Frankly.

  • The issue and redemption fees in favour of the fund that apply whenever shares are bought/sold.

  • The part of the money that isn’t invested (there are always of few cents staying on the sidelines).

  • The opportunity loss of having new money sitting in cash for 3 days when it gets invested.

Should these be counted as part of the benchmark (in which case, the “Extreme 95 Index” strategy would be it, since this one will only be buying and holding fund shares with all the fees that it implies) or do you want them to show in the time-weighted performance of the strategies?

Aah, I see. Then not much of a result so far I guess as the strategy so far is just invested :slight_smile:

Did Trendfollowimg for a long time, but then gave it up in 2015. My key learning was that it was easy to mix up good absolute return with good benchmark return. What matters is if you beat the Index.

The best way to validate this is if you take a time weighted return; and put it in a chart next to the Benchmarks time weighted return. And then probably use a log scale so that the Delta can be compared even over time.

The below is an example of my SPI Trend Follower (red) with Cash Invests (green) vs. the SPI (Blue). The Log Scale allows to interpret how the over-performance evolved over time. Post 2016, had continued the strategy on paper for a while; might be interesting to see where it stood right now; but given Dec 2018 and March 2020; I suspect that TrendFollowing wouldn’t have worked out that well these years.

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Thanks, that will probably be included in the first graphs once there’s a difference between B&H and following my signals. I’ll switch to log scale a bit later, I like the normal scale for the early stages.

So, leaving alone the 3a part of this experiment, would you suggest also plotting a few indexes for comparison? I wouldn’t know which ones to chose but I guess the swiss SPI and FTSE Global All Cap Index (used for VT) could be a start.

What made you stop in 2015? Another use for this money/other funds to invest in or getting bored with the time spent on it? You did catch that 2008 crisis quite well, congrats!

I would track against B&H of the underlying fund. You cant directly invest into MSCI World; so thats not a good alternative to compare against. So your plotting against the Frankly product sounds right.

This was always funny money plays to keep me from trading my larger B&H. Somewhen I realized that it was not stable enough to invest in a large scale; wrong signals kill your performance. At the same time, it became too much effort. The above is a hybrid of multiple trends, traded on a monthly basis, and always took me 30 mins plus a month to calculate if there was a need for change.

Ultimately; I learnt that Trend Following imcreases risk adjusted short term returns - whilst piling up material long tail risk. Meaning that you can be successful for 10 years and the n miss it all if you in one bull move stand at the wromg side of the market; its a gamble but if you ask me just not worth it as you cant beat the market consistently - you can only be lucky for a long time…

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I wasn’t convinced by Wolverine’s idea until I saw your chart. You are right you will miss some big up days but you missed the big downsides whilst still participating in some of the gains. Perhaps the approach has merit when you transition from the “wealth accumulation” phase to “wealth preservation”. Historically the approach was to rotate from stocks to bonds but not sure that works right now

Took the bad weather to fast forward a few of my old trend following strategies (these are calculated return with 0.5% Buy / Zero Sell Cost). Could not do the one posted above as that was a fairly complex strategy that incorporates multiple strategies; so I took a single strategy that works with moving averages. The above one not only takes moving averages but as well changes in FX and Interest Rates.

The attached TrendFollower was one of my more promising ones; It simply works with different weekly moving averages and then on a monthly basis assesses them and comes down with a monthly buy/sell signal.

As you can probably see, the Strategy had worked extremely well in the great financial crisis; but it under-performed heavily in the Bull Market since. If I knew that turbulent times were ahead; I could definitely switch back to Trend Following strategies… but if so; I would rather just reduce my equity exposure; no?

The Problem with Trend Following truly is that there is no free Lunch. You can beat the market in the short run but you take Long Tail Risks that eventually kick-in. Given that you in the process incur both efforts and cost; you will net net and over the long run incur a loss.

Big warning from my Side - DO NOT PLAY WITH TREND FOLLOWERS… its a nice illusion but not worth the pain.

First of all, how did the Single Strategy Trend Follower (weekly moving averages; monthly trading) perform:

We see that there were only very few “bad” signals. The 2015 to 2016 period was probbably okish. But December 2018 did not go well. Same applies for March 2020. When we then put things in a Log Scale, We see how bad that truly was (ok, must admit Log probably only fully works out on even longer durations :grinning_face_with_smiling_eyes:, not that much of a difference here).

The most astonishing chart is when we compare how Total Return of the Trend Follower compared with the Index (thats the TRUE test for a Trend Follower):

Well… its individual months that just kill the performance and I believe that its nearly impossible for a Trend Follower to analyze December 2018 or March 2020 and to adequately differ between “keep beeing invested” and “go out of the market”.

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And just as a last comment; when you model Trend Followers - you will discover the holy grail. Just remember: You don’t see a real opportunity but simply long tail risk. You never know but somewhen things will bite you extremely hard. But, you will still think you had a holy grail in front of your self as the backtrack and probably even worst the first few months look just amazing - simply as you don’t see the long tail and its impact yet. The more holy, the more toxic.

Just what I mean with that, please find my cumulate multi-trend follower Portfolio from 2005 to 2015 attached. Just as a disclaimer, not all of this was real returns (otherwise - I might probably still be addicted to it haha) but from about 2010 onwards, I enjoyed most of these returns until I stopped the game in 2015. the 2011 drop was my “proof of concept” that this actually worked; but this still on a tiny Portfolio with play money only.

The logic behind this Portfolio was a weighted Portfolio of multiple Trend-Following Strategies (like the ones above) on multiple asset classes (SPI, Global Shares, Gold, Gold vs. Shares). This with a certain “booster” factor that accelerated along the Trend Follower’s consensus. This is also why you see that the Trend Follower in some circumstances went to about -2% of cash aka borrowed a bit of cash from the remaining Portfolio.

When I have a look at a few strategies that I could easily fast-forward on paper the last few minutes; I think that the 2018 and 2020 performance would have been terrible; So I am very glad I left this black magic behind and stopped trying to be smartass.

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