Generating Equity Returns with Bond Risk

Discussion in 'Share Investing Strategies, Theories & Education' started by Gav, 19th Oct, 2021.

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  1. Gav

    Gav Well-Known Member

    Joined:
    28th Sep, 2016
    Posts:
    201
    Location:
    Sydney
    May 2022 System update
    As stated above, SPY & IYR were stopped out in May, and will remain out while below their 10M MA's. DBC still in,so 1/3 DBC and 2/3 cash at present.
    SPY - -0.2%
    IYR - -7.0%
    DBC - +4.61%

    Net result was -0.8% for the month, and +2.9% YTD. Very conservative portfolio at the moment.

    As has been stated before, this thread is meant as an introduction to a different style of investing and managing your risk (trend following). It is not for everybody, and requires a lot of research, understanding how the system works (and does not ) in different market conditions before you would even consider trading it. It is not designed to be a return enhancer, but is more a risk reducer.

    The system I run is slightly different to the one presented in the paper in the first post, where I have tweaked the system to my personality (just full disclosure). Do your own research, past returns are no indication of future returns etc.
     
  2. Gav

    Gav Well-Known Member

    Joined:
    28th Sep, 2016
    Posts:
    201
    Location:
    Sydney
    June 2022 System update
    System is 1/3 invested , only in DBC (Commodities). DBC had a big reversal this month, not sure if it means anything, but maybe we have seen the top of the inflation numbers - but maybe not!
    SPY - Out
    IYR - Out
    DBC - -7.5%

    Net result was -2.5% for the month, and -0.4% YTD. Very conservative portfolio at the moment. (YTD numbers changed slightly, was not using rebalancing monthly, now fixed)

    As has been stated before, this thread is meant as an introduction to a different style of investing and managing your risk (trend following). It is not for everybody, and requires a lot of research, understanding how the system works (and does not ) in different market conditions before you would even consider trading it. It is not designed to be a return enhancer, but is more a risk reducer.

    The system I run is slightly different to the one presented in the paper in the first post, where I have tweaked the system to my personality (just full disclosure). Do your own research, past returns are no indication of future returns etc.
     
  3. Gav

    Gav Well-Known Member

    Joined:
    28th Sep, 2016
    Posts:
    201
    Location:
    Sydney
    July 2022 System update
    System is 1/3 invested , only in DBC (Commodities). DBC down again this month (-1.99%). A good example of a month where we appear to have been whipsawed, with equity markets having a very good month. Time will tell if the bottom is in for equities, or if it's a bear market bounce. No change in the portfolio for August.

    SPY - Out
    IYR - Out
    DBC - -1.99%

    Net result was -0.66% for the month, and -1.36% YTD. Very conservative portfolio at the moment. (YTD numbers changed slightly, was not using rebalancing monthly, now fixed)

    As has been stated before, this thread is meant as an introduction to a different style of investing and managing your risk (trend following). It is not for everybody, and requires a lot of research, understanding how the system works (and does not ) in different market conditions before you would even consider trading it. It is not designed to be a return enhancer, but is more a risk reducer.

    The system I run is slightly different to the one presented in the paper in the first post, where I have tweaked the system to my personality (just full disclosure). Do your own research, past returns are no indication of future returns etc.
     
    ChrisP73 likes this.
  4. Gav

    Gav Well-Known Member

    Joined:
    28th Sep, 2016
    Posts:
    201
    Location:
    Sydney
    August 2022 System update
    System is 1/3 invested , only in DBC (Commodities). DBC down again this month (-1.49%). After a strong start to the month, equities (and bonds) sold off after hawkish comments from the fed. A good month to be underinvested.

    SPY - Out
    IYR - Out
    DBC - -1.49%

    Net result was -0.5% for the month, and -1.9% YTD. Very conservative portfolio at the moment. (YTD numbers changed slightly, was not using rebalancing monthly, now fixed)

    As has been stated before, this thread is meant as an introduction to a different style of investing and managing your risk (trend following). It is not for everybody, and requires a lot of research, understanding how the system works (and does not ) in different market conditions before you would even consider trading it. It is not designed to be a return enhancer, but is more a risk reducer.

    The system I run is slightly different to the one presented in the paper in the first post, where I have tweaked the system to my personality (just full disclosure). Do your own research, past returns are no indication of future returns etc.
     
    ChrisP73 likes this.
  5. Gav

    Gav Well-Known Member

    Joined:
    28th Sep, 2016
    Posts:
    201
    Location:
    Sydney
    September 2022 System update
    System is 1/3 invested , only in DBC (Commodities). DBC down again this month (-7.04%). Markets had a terrible month, once again great to be underinvested.

    SPY - Out
    IYR - Out
    DBC - 7.04%

    Net result was -2.3% for the month, and -4.3% YTD. Very conservative portfolio at the moment. (YTD numbers changed slightly, was not using rebalancing monthly, now fixed)
    As DBC closed below its 10M MA, a stop loss has been placed - Quite possible the system will move to zero invested during the month.

    As has been stated before, this thread is meant as an introduction to a different style of investing and managing your risk (trend following). It is not for everybody, and requires a lot of research, understanding how the system works (and does not ) in different market conditions before you would even consider trading it. It is not designed to be a return enhancer, but is more a risk reducer.

    The system I run is slightly different to the one presented in the paper in the first post, where I have tweaked the system to my personality (just full disclosure). Do your own research, past returns are no indication of future returns etc.
     
    ChrisP73 and Piston_Broke like this.
  6. Gav

    Gav Well-Known Member

    Joined:
    28th Sep, 2016
    Posts:
    201
    Location:
    Sydney
    October 2022 System update
    System is 1/3 invested , only in DBC (Commodities). In a very strong month for the markets, the system underperformed, but still a positive month, and approaching breakeven for the year, a good result.

    SPY - Out
    IEF - Out
    DBC - +5.06%

    Net result was +1.7% for the month, and -2.9% YTD. Very conservative portfolio at the moment.
    As DBC is still below it's 10M MA, the stop remains in place.
    In the theoretical portfolio, IYR has been replaced by IEF (Bonds), but as it is below it's 10M ma, that portion of the portfolio remains in cash.

    As has been stated before, this thread is meant as an introduction to a different style of investing and managing your risk (trend following). It is not for everybody, and requires a lot of research, understanding how the system works (and does not ) in different market conditions before you would even consider trading it. It is not designed to be a return enhancer, but is more a risk reducer.

    The system I run is slightly different to the one presented in the paper in the first post, where I have tweaked the system to my personality (just full disclosure). Do your own research, past returns are no indication of future returns etc.
     
    Piston_Broke likes this.
  7. Gav

    Gav Well-Known Member

    Joined:
    28th Sep, 2016
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    201
    Location:
    Sydney
    November 2022 System update
    System is 1/3 invested , only in DBC (Commodities). In another strong month for the markets, the system underperformed, but still a positive month, and down 2.3% for the year, a decent result.

    SPY - Out
    IEF - Out
    DBC - +1.5%

    Net result was +0.5% for the month, and -2.4% YTD. Very conservative portfolio at the moment.
    As DBC is still below it's 10M MA, the stop remains in place.
    Going into November, we have buy signals on SPY & EFA (Foreign Equities). This could see us back to 100% invested in December if the orders get triggered.

    As has been stated before, this thread is meant as an introduction to a different style of investing and managing your risk (trend following). It is not for everybody, and requires a lot of research, understanding how the system works (and does not ) in different market conditions before you would even consider trading it. It is not designed to be a return enhancer, but is more a risk reducer.

    The system I run is slightly different to the one presented in the paper in the first post, where I have tweaked the system to my personality (just full disclosure). Do your own research, past returns are no indication of future returns etc.
     
    Piston_Broke likes this.
  8. Gav

    Gav Well-Known Member

    Joined:
    28th Sep, 2016
    Posts:
    201
    Location:
    Sydney
    December 2022 System update
    The system became fully invested in December, possibly not the best time to have done so, but them's the rules...

    SPY - -5.7%
    EFA - -1.8%
    DBC - -2.7%

    Net result was -3.4%% for the month, and -5.8% YTD. Not the end we wanted to the year, but still a healthy outperformance over the S&P.
    Going into January, DBC and SPY are now below there moving averages, so a possibility they will be sold , which would be a nasty whipsaw for the system - time will tell.

    As has been stated before, this thread is meant as an introduction to a different style of investing and managing your risk (trend following). It is not for everybody, and requires a lot of research, understanding how the system works (and does not ) in different market conditions before you would even consider trading it. It is not designed to be a return enhancer, but is more a risk reducer.

    The system I run is slightly different to the one presented in the paper in the first post, where I have tweaked the system to my personality (just full disclosure). Do your own research, past returns are no indication of future returns etc.
     
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  9. Gav

    Gav Well-Known Member

    Joined:
    28th Sep, 2016
    Posts:
    201
    Location:
    Sydney
    January 2023 System update

    A strong month in January gave us a good start to the year - the allocation to commodities being a drag on the portfolio.

    SPY - +6.3%
    EFA - +9.0%
    DBC - +0.9%

    Net result was +5.4%% for the month, and +5.4% YTD.

    Same allocation going into February, no change to the portfolio.

    As has been stated before, this thread is meant as an introduction to a different style of investing and managing your risk (trend following). It is not for everybody, and requires a lot of research, understanding how the system works (and does not ) in different market conditions before you would even consider trading it. It is not designed to be a return enhancer, but is more a risk reducer.

    The system I run is slightly different to the one presented in the paper in the first post, where I have tweaked the system to my personality (just full disclosure). Do your own research, past returns are no indication of future returns etc.
     
    Piston_Broke and spoon like this.
  10. Gav

    Gav Well-Known Member

    Joined:
    28th Sep, 2016
    Posts:
    201
    Location:
    Sydney
    February 2023 System update

    A tougher month in February, with all 3 sectors we are invested in down for the month

    SPY - -2.5%
    EFA - -3.1%
    DBC - 4.5%

    Net result was -3.3%% for the month, and +1.9% YTD.

    Same allocation going into March, no change to the portfolio - DBC however has a hard stop on it still, was almost stopped out in Feb.

    As has been stated before, this thread is meant as an introduction to a different style of investing and managing your risk (trend following). It is not for everybody, and requires a lot of research, understanding how the system works (and does not ) in different market conditions before you would even consider trading it. It is not designed to be a return enhancer, but is more a risk reducer.

    The system I run is slightly different to the one presented in the paper in the first post, where I have tweaked the system to my personality (just full disclosure). Do your own research, past returns are no indication of future returns etc.
     
  11. mrdobalina

    mrdobalina Well-Known Member

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    1,930
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    there's more to life than working
    Thanks for your persistence and monthly updates on your strategy.

    Have you have done any quantitative backtest on your strategy and if so, what were the results? The monthly execution and long time frame is interesting, and I suspect drawdowns will be significant when they occur. In Jerry Parker's (the trend following hedge fund manager) words, that is extremely "loose pants".
     
  12. Gav

    Gav Well-Known Member

    Joined:
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    Sydney
    Hi and apologies for the late reply.
    The strategy is backtested to 1973, and outperformed a buy and hold strategy by over 3%, and reduced drawdowns from 46% (Buy & Hold) to 13%. Bear in mind this is before any trading costs/slippage etc, so generous results.
    At its core a trend following strategy like this is not meant to produce outsize returns, but to reduce risk, which it does very well.
    I have attached Meb Fabers paper, which goes further into the details, and is a good read. I also recommend his book, "The Ivy Portfolio" for a great overview of his papers.
     

    Attached Files:

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  13. Gav

    Gav Well-Known Member

    Joined:
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    Location:
    Sydney
    March 2023 System update

    March was a crazy month, starting well, then the bank madness hit and everything sold off, only to finish positive for the month. Our commodities position, DBC was stopped out during the month - this may prove to be a whipsaw, as it recovered into month end, but such are the risks of trading a trend following strategy. Interestingly we now have a buy signal on Govt bonds (IEF), which is the first time in a long time we will be going long bonds.
    March results

    SPY - +3.7%
    EFA - +3.1%
    DBC - -1.8%

    Net result was +1.6% for the month, and +3.5% YTD.

    So going into April we stay long EFA and SPY, and will buy IEF.

    As has been stated before, this thread is meant as an introduction to a different style of investing and managing your risk (trend following). It is not for everybody, and requires a lot of research, understanding how the system works (and does not ) in different market conditions before you would even consider trading it. It is not designed to be a return enhancer, but is more a risk reducer.

    The system I run is slightly different to the one presented in the paper in the first post, where I have tweaked the system to my personality (just full disclosure). Do your own research, past returns are no indication of future returns etc.
     
  14. Gav

    Gav Well-Known Member

    Joined:
    28th Sep, 2016
    Posts:
    201
    Location:
    Sydney
    April 2023 System update

    As mentioned last month, the system rotated out of Commodities and into bonds, and is now long US Govt Bonds, S&P 500, and EFA (Foreign Developed). The rotation worked ok in April, with commodities down and bonds up, but it's way too soon to tell. The Foreign Developed position continues to work well.
    April results

    SPY - +1.6%
    EFA - +2.9%
    IEF - +0.8%

    Net result was +1.% for the month, and +5.3% YTD.

    No change in the portfolio going into May

    As has been stated before, this thread is meant as an introduction to a different style of investing and managing your risk (trend following). It is not for everybody, and requires a lot of research, understanding how the system works (and does not ) in different market conditions before you would even consider trading it. It is not designed to be a return enhancer, but is more a risk reducer.

    The system I run is slightly different to the one presented in the paper in the first post, where I have tweaked the system to my personality (just full disclosure). Do your own research, past returns are no indication of future returns etc.
     
  15. Gav

    Gav Well-Known Member

    Joined:
    28th Sep, 2016
    Posts:
    201
    Location:
    Sydney
    May 2023 System update

    A poor month for the system, but basically unless you were long tech you lost money in May. Foreign stocks down, bonds down, commodities down, S&P up marginally driven mainly by the mega caps in tech.(Russell 2000 down 0.8%)
    May results

    SPY - +0.5%
    EFA - -4.0%
    IEF - -1.4%

    Net result was -1.6% for the month, and +3.6% YTD.

    No change in the portfolio going into June.

    As has been stated before, this thread is meant as an introduction to a different style of investing and managing your risk (trend following). It is not for everybody, and requires a lot of research, understanding how the system works (and does not ) in different market conditions before you would even consider trading it. It is not designed to be a return enhancer, but is more a risk reducer.

    The system I run is slightly different to the one presented in the paper in the first post, where I have tweaked the system to my personality (just full disclosure). Do your own research, past returns are no indication of future returns etc.
     
    Piston_Broke and willair like this.
  16. Gav

    Gav Well-Known Member

    Joined:
    28th Sep, 2016
    Posts:
    201
    Location:
    Sydney
    June 2023 System update

    A solid month, driven by stellar returns in the S&P 500 (up 6.5%) and Foreign Developed (up 4.5%). Bonds were a drag on the portfolio this month (-1.2%), and are being switched out for real estate going into next month (IYR)
    June results

    SPY - +6.5%
    EFA - +4.5%
    IEF - -1.2%

    Net result was +3.25% for the month, and +6.9% YTD.

    Going into June we are switching out bonds(IEF) for US Real Estate (IYR), according to the rules.

    As has been stated before, this thread is meant as an introduction to a different style of investing and managing your risk (trend following). It is not for everybody, and requires a lot of research, understanding how the system works (and does not ) in different market conditions before you would even consider trading it. It is not designed to be a return enhancer, but is more a risk reducer.

    The system I run is slightly different to the one presented in the paper in the first post, where I have tweaked the system to my personality (just full disclosure). Do your own research, past returns are no indication of future returns etc.
     
  17. Gav

    Gav Well-Known Member

    Joined:
    28th Sep, 2016
    Posts:
    201
    Location:
    Sydney
    July 2023 System update

    Another solid month for the system, all 3 components in the green.
    July results

    SPY - +3.3%
    EFA - +2.7%
    IEF - +1.7%

    Net result was +2.6% for the month, and +9.7% YTD.

    No change in the portfolio going into August.

    As has been stated before, this thread is meant as an introduction to a different style of investing and managing your risk (trend following). It is not for everybody, and requires a lot of research, understanding how the system works (and does not ) in different market conditions before you would even consider trading it. It is not designed to be a return enhancer, but is more a risk reducer.

    The system I run is slightly different to the one presented in the paper in the first post, where I have tweaked the system to my personality (just full disclosure). Do your own research, past returns are no indication of future returns etc.
     
  18. sfdoddsy

    sfdoddsy Well-Known Member

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    Sydney
    Interesting thread which I've followed passively for a while.

    I'm curious about your time frame. I assume it is long-term due to the comparisons with buy and hold, but your strategy feels very short-term and reactive by chasing trends to reduce volatilty and boost returns.

    The period you choose for comparisons is pretty important.

    The performance in the initial study looks very rosy, but assuming the performance of the Gane Capital fund on your site reflects the recent results of the strategy (and if doesn't I apologise and will happily retract and remove this screed), jumping in when you first posted would have been the worst possible timing.

    Buy and hold with VGS seems to have double the return over 5 years, and considerably more since October 21.

    I just can't see how the promise is reflected in reality.
     
  19. Gav

    Gav Well-Known Member

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    Sydney
    Thanks for following.
    This strategy is very much long term - the backtesting period goes back to 1970.
    My Fund until last May did not employ this strategy at all, it was purely single stocks (20 single stocks) chosen by following the most successful hedge funds (Meb Faber's clone strategy).
    After the tech selloff , I have realised that is way too volatile - my bad.
    Last May I amended the strategy employed by the Fund, it is now 20% single stocks (same as old strategy), 45 % the strategy in this thread, and 35% a similar rotation strategy based on the US sectors - this has made the Fund's returns much more stable - as more than 50% of the Fund is mine, stability is more important for me!
    Please shout if you have more questions.
    cheers
     
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  20. Ross36

    Ross36 Well-Known Member

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    I've looked into the pros and cons of using moving average strategies, and from my analysis they're nowhere near as good as Faber makes them out to be, but still have their place. In fairness though, he has stated previously (from memory) that the methods did not work well in many markets outside of the USA - which was a big red flag for me as that implied it may have been a purely random finding that it worked. They also tend to be a mixed bag in terms of achieving the goal of stopping negative tail risks (i.e. long periods of poor performance), but what they do tend to do very effectively is reduce positive tail risks (i.e. reduce the long periods of very high performance).

    However, they're not without merit if used in the right situation. The returns tend to have moderate to low association with the index they are tracking over decade + time periods. They also have similar or only modestly lower expected returns ON AVERAGE (key point there), so they could form a part of a diversified portfolio. That's the holy grail of diversification "free lunch", as holding multiple funds in even balance with similar expected returns that are only modestly associated with each other should provide more stable returns than holding either one by itself.

    Also - they have managed to sidestep some of the nastiest times in share market history. The late 60's early 70's was horrible in Australia, but from my analysis MA strategies bypassed it well and would have been a supercharger for returns. And they did very well during the GFC, not to mention the great depression in USA stocks.

    However, the implementation would be tricky in markets like Australia where dividends are a major component of the return. How do you incorporate them into the MA algorithm? And what about franking credits? Include them in the MA or not? And tax issues from ducking in and out?

    I do appreciate @Gav posting his returns here, I do follow them as well because I will incorporate this sort of method (in a relatively small fraction) in my superannuation as I get closer to redeeming age.