I am taking another strategy for a test ride starting tomorrow and would like some opinions. I found it several years ago and bought a Kindle book. The author is David Alan Carter. It's very mechanical, momentum based, and you make from zero to four total trades the first trading day of each month. Here is the very short version of the rules.
You own two ETFs at any given time in a 60% equity/40% split. (Provided they meet "risk on" criteria)
Consists of four equity ETFs and two bond ETFs,
-SPY
-QQQ
-Russell 2K
-S&P Midcap 400
-20YR Treasury (TLT)
-JNK Longterm Corporate bond fund. mostly BB bonds
I need to consult the rules but if nothing meets the minimum stand for risk on then it has a ultra short-term cash like feature. My Kindle reader crashed so need to re-download the book for a few details.
Last trading day of month I get an email with next months trades which is free because I spent $5 on the book. He has been sending them for years but at the time commissions applied to my account and I thought I could match performance. I pretty much did that the past few years but the max drawdowns on this strategy were far superior to mine.
Backtested to beginning of great recession it has the following stats. 12.3% CAGR vs SPY 7.9% Max drawdown during Great Recession was 11.7% vs about 47.6% for SPY. 2020 was the most volatile year. Max drawdown 13.4%. Total return was 40.6%. It has consistently avoided downdrafts in equity markets that exceed thirty days. It won't jump back in on a couple day dead cat bounce. It tends to sit in the same equity ETF for multiple months if it is still working.
The bad news, it requires some reasonable holding period to have a reasonable assurance of beating SPY by that margin. It has not beaten SPY 6 of 13 yrs but it doesn't get beat up significantly for long. Only batting about .500 on an annual basis but it has soundly beaten SPY in other years as it tends to camp out in QQQ when it goes on a run that lasts a quarter or more.
The JNK ETF set off a my warning signal until I checked a long-term chart. It's as smooth as most any boring blue chip stock I own and a 5% yield currently. It holds 1% bond positions in shaky stocks like cruiselines and airlines, but mostly it's diversified and not too scary overall. If things go bad you won't be in it at the end of the month and won't return until some stability returns.
It's not hard to imagine situations where it could possibly fail. What if your ETF crashes a day after you invest and you bail 30 days later just before it suddenly recovers? What if you get out right before a big run and miss a month of strong gains? All of that could certainly happen repeatedly, but the back testing indicates it works out more than well enough. It's been backtested with different trade intervals and performance was inferior.
My conclusion for now on reasonable data through some rough markets... It avoids drawdowns by a wide margin better than I have done with individual stocks. None of the equity ETFs scare me as I have or currently own then anyway. This is actually a very simple strategy compared to what I do now. A quarter is way too short to make decisions from, but I am going to increase my port allocation to this strategy if I fail to match it with risk reward considered.
So tomorrow I invest $30K. 60% in Russell 2000 and 40% in JNK. For now, little affect on the conservative option or DGI game I currently employ. Maybe this will force me to assess underperforming DGI stocks. That's not a terrible thing. Maybe I'll have a substantial portion of my port in this soon?
Comments?
You own two ETFs at any given time in a 60% equity/40% split. (Provided they meet "risk on" criteria)
Consists of four equity ETFs and two bond ETFs,
-SPY
-QQQ
-Russell 2K
-S&P Midcap 400
-20YR Treasury (TLT)
-JNK Longterm Corporate bond fund. mostly BB bonds
I need to consult the rules but if nothing meets the minimum stand for risk on then it has a ultra short-term cash like feature. My Kindle reader crashed so need to re-download the book for a few details.
Last trading day of month I get an email with next months trades which is free because I spent $5 on the book. He has been sending them for years but at the time commissions applied to my account and I thought I could match performance. I pretty much did that the past few years but the max drawdowns on this strategy were far superior to mine.
Backtested to beginning of great recession it has the following stats. 12.3% CAGR vs SPY 7.9% Max drawdown during Great Recession was 11.7% vs about 47.6% for SPY. 2020 was the most volatile year. Max drawdown 13.4%. Total return was 40.6%. It has consistently avoided downdrafts in equity markets that exceed thirty days. It won't jump back in on a couple day dead cat bounce. It tends to sit in the same equity ETF for multiple months if it is still working.
The bad news, it requires some reasonable holding period to have a reasonable assurance of beating SPY by that margin. It has not beaten SPY 6 of 13 yrs but it doesn't get beat up significantly for long. Only batting about .500 on an annual basis but it has soundly beaten SPY in other years as it tends to camp out in QQQ when it goes on a run that lasts a quarter or more.
The JNK ETF set off a my warning signal until I checked a long-term chart. It's as smooth as most any boring blue chip stock I own and a 5% yield currently. It holds 1% bond positions in shaky stocks like cruiselines and airlines, but mostly it's diversified and not too scary overall. If things go bad you won't be in it at the end of the month and won't return until some stability returns.
It's not hard to imagine situations where it could possibly fail. What if your ETF crashes a day after you invest and you bail 30 days later just before it suddenly recovers? What if you get out right before a big run and miss a month of strong gains? All of that could certainly happen repeatedly, but the back testing indicates it works out more than well enough. It's been backtested with different trade intervals and performance was inferior.
My conclusion for now on reasonable data through some rough markets... It avoids drawdowns by a wide margin better than I have done with individual stocks. None of the equity ETFs scare me as I have or currently own then anyway. This is actually a very simple strategy compared to what I do now. A quarter is way too short to make decisions from, but I am going to increase my port allocation to this strategy if I fail to match it with risk reward considered.
So tomorrow I invest $30K. 60% in Russell 2000 and 40% in JNK. For now, little affect on the conservative option or DGI game I currently employ. Maybe this will force me to assess underperforming DGI stocks. That's not a terrible thing. Maybe I'll have a substantial portion of my port in this soon?
Comments?