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The 12% Solution Strategy
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,
-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?  

Well momentum is proven to be one of the only consistent edges in the market, so that part is fine.

This part is a little less appealing-12.3% CAGR vs SPY 7.9% Max drawdown during Great Recession was 13.94%
Drawdown quite a bit more than CAGR, not horrible but in principle me no like.

How often it beats SPY is of no concern, total performance is, i.e. would one have been able to capture all of the SPY gains with its huge drawdown.

It looks like a solid strategy, when you can please share the signal criteria and can you do it on your own or are you beholden to their signal?

Good luck with it.
Yes you can calculate signal yourself. It isn't complex. I need to download the book again. What I couldn't do easily is backrest it myself quickly. That would be tedious. He now has a website with several similarly structured strategies and charges a subscription for those signals. The new strats are diverse. 3X leveraged-bonds only etc. The 12% remains the base strategy he recommends. He is trying to monetize his work more now, but still avoids the big promises snake oil salesman technique. That's my impression anyway. He has an article or two on SA but practically zero responses.
(03-01-2021, 07:47 AM)fenders53 Wrote:   He has an article or two on SA but practically zero responses.

Frankly because some guys there are giving away better strategies.  Undecided
(03-01-2021, 07:52 AM)NilesMike Wrote:
(03-01-2021, 07:47 AM)fenders53 Wrote:   He has an article or two on SA but practically zero responses.

Frankly because some guys there are giving away better strategies.  Undecided
I am all ears for other strategies you have to share with this performance that require about zero effort on my part.  I don't want to be scanning for trigger points daily to make a trade.  Not because I am lazy, but the rest of my strategies are very time consuming when the market gets choppy.  Sometimes I have time for it and there is a potential penalty when I don't. I am looking for a forget about it strategy that isn't cash or buy and hold beat up equities for 5 years. That time will come again. Just need a place to park some of my assets.

Edited original post stats after downloading book update. 2020 was nuts. Max drawdown was -13.4%. Total return +40.6%

Here is the "lookback" process. It's very simple to compute and interpret. I could do it myself and trade on the 5th of every month if I cared to. It's based on preceding "two months" of 31 day trading sessions, or 62 open-closes. Pretty much a three "calendar month" look back for momentum. If none of the four index ETFs outperforms SHY, which is basically a short-term treasury ETF that yields about nothing over three months, the 60% risk on portion goes to cash. While ST interest rates are basically zero, the trigger is anything positive at all. It self adjusts some for a different environment. If short-term rates were 3% it is not going to go risk on because SPT is +.2%. The last few months it would have. The hedge portion is always in play. He doesn't see a need to hedge a hedge. They are conservative by nature anyway.

I didn't invest today. I'll allow whomever cares to a chance to throw rocks at it. Smile I did ask for opinions.
These three, for instance, beat the 12% solution handily with the same amount of effort.
Thanks, This actually looks like one of David's high flier ports with the 3X leverage. I will check them out. Will I be able to back test these from 2008 and catch the financial crisis? That's a must before I put big money in anything. Anyway I will read up on them.
They are actually very similar in construction. Similar funds and moving average time periods used. Leveraged or not and performance isn't meaningfully different when compared to appropriate competing strategy. IMO that's validation the general concept works with proper fund selection. I'm not sure if I can strip the financial crisis out of the 12% because to my knowledge 1/1/08 is the start date for all his strats. He chose ETFs that existed then so he could capture the major black swan. He was writing his book prior to the big run up the past few years so he had to address 2008-2010 to be taken seriously. A back test period entirely during a bull market is on shakey ground. The hedging should work though we are in a previously uncharted interest rate environment.
(03-01-2021, 10:17 PM)fenders53 Wrote: Thanks, This actually looks like one of David's high flier ports with the 3X leverage.  I will check them out.  Will I be able to back test these from 2008 and catch the financial crisis? That's a must before I put big money in anything.  Anyway I will read up on them.

Convertible bonds going back to 1998

CAGR 12.9%
Drawdown <9%
1 negative year and 73% positive monthly returns

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