Author Topic: Dual Momentum Investing  (Read 221166 times)

hodedofome

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Re: Dual Momentum Investing
« Reply #300 on: April 28, 2015, 11:18:56 AM »
http://turtletrader.com/pdfs/zerosum.pdf

Three groups of stylized characteristic traders are examined. Winning traders trade for profit. Utilitarian traders trade because their external benefits of trading are greater than their losses. Futile traders expect to profit but for a variety of reason their expectation are now realized.

Winning traders make prices efficient and provide most liquidity. Utilitarian and futile traders effectively underwrite the winning traders' efforts.


Consistent with my link several pages before, on the podcast with Eric Crittendon where he describes commercial hedgers provide for a consistent stream of profits to trend following traders. Commercial hedgers are willing to do this because they see it as buying insurance, and trend following traders are on the other side of those trades. As long as commercial hedgers are willing to do this, there should be profits available for trend followers.

That, and this problem http://cgt.columbia.edu/wp-content/uploads/2013/12/Woolley-Santos-Jurek-Theoretical-Analysis-of-Value-and-Momentum.pdf

I'm reposting Miles' link because I can pretty much guarantee you that nobody here read it.

George Soros' theory of reflexivity, where price movements themselves cause people to react to it, creating a cycle of disequilibrium http://www.ft.com/cms/s/2/0ca06172-bfe9-11de-aed2-00144feab49a.html#axzz3Ycqf2W2I

There's good research out there for the continuation of trends, but if you aren't gonna believe it then there's nothing I or anyone else can do for you.
« Last Edit: April 28, 2015, 11:24:49 AM by hodedofome »

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Re: Dual Momentum Investing
« Reply #301 on: April 28, 2015, 11:24:26 AM »
I don't think you understand the phrase "catching a falling knife"--it means don't attempt to time the market, and say "oh, momentum is down, so let me buy it" because you'll get cut as it falls further.

My quotes were indicative of why market timing can be a fool's game, even when you're right.  They don't indicate that one should "use momentum in the past as a loss-avoidance strategy," as you claim.

I'm not going to argue that you don't understand the phrase, but I certainly do. To argue against buying when momentum is negative is, by definition, a momentum strategy. Trying to perfectly time the bottom is not a momentum strategy.
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arebelspy

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Re: Dual Momentum Investing
« Reply #302 on: April 28, 2015, 11:36:08 AM »
I don't think you understand the phrase "catching a falling knife"--it means don't attempt to time the market, and say "oh, momentum is down, so let me buy it" because you'll get cut as it falls further.

My quotes were indicative of why market timing can be a fool's game, even when you're right.  They don't indicate that one should "use momentum in the past as a loss-avoidance strategy," as you claim.

I'm not going to argue that you don't understand the phrase, but I certainly do. To argue against buying when momentum is negative is, by definition, a momentum strategy. Trying to perfectly time the bottom is not a momentum strategy.

Please don't put words in my mouth.  I'm not arguing against buying when momentum is negative.  Or positive.  Or trying to time anything at all.  I never have.

I advocate for making investments on fundamentals and reason/logic.  Momentum has nothing to do with it.  Solid investment strategies do.
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milesdividendmd

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Re: Dual Momentum Investing
« Reply #303 on: April 28, 2015, 11:42:04 AM »
I don't think you understand the phrase "catching a falling knife"--it means don't attempt to time the market, and say "oh, momentum is down, so let me buy it" because you'll get cut as it falls further.

My quotes were indicative of why market timing can be a fool's game, even when you're right.  They don't indicate that one should "use momentum in the past as a loss-avoidance strategy," as you claim.

I'm not going to argue that you don't understand the phrase, but I certainly do. To argue against buying when momentum is negative is, by definition, a momentum strategy. Trying to perfectly time the bottom is not a momentum strategy.

Please don't put words in my mouth.  I'm not arguing against buying when momentum is negative.  Or positive.  Or trying to time anything at all.  I never have.

I advocate for making investments on fundamentals and reason/logic.  Momentum has nothing to do with it.  Solid investment strategies do.

Please articulate the underlying fundamentals and reason/logic of your "solid investment strategy."  I don't believe you've done that yet.
« Last Edit: April 28, 2015, 11:47:11 AM by milesdividendmd »
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Re: Dual Momentum Investing
« Reply #304 on: April 28, 2015, 11:42:48 AM »
I don't think you understand the phrase "catching a falling knife"--it means don't attempt to time the market, and say "oh, momentum is down, so let me buy it" because you'll get cut as it falls further.

My quotes were indicative of why market timing can be a fool's game, even when you're right.  They don't indicate that one should "use momentum in the past as a loss-avoidance strategy," as you claim.

I'm not going to argue that you don't understand the phrase, but I certainly do. To argue against buying when momentum is negative is, by definition, a momentum strategy. Trying to perfectly time the bottom is not a momentum strategy.

The thread context you're citing is ARS saying why applying leverage and market timing is hard. In that case, he was saying that if you think you're at the bottom of the market and lever up, you might be wrong and get cut really badly if the market continues to fall. His position there was making no statement about momentum. He was saying it was very risky to try to time the market like that because it can go very poorly (even wipe you out) if you get the timing wrong. The discussion there about leverage does not really apply to this discussion. And I don't find anything inconsistent with his statements here and those from the prior thread.

arebelspy

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Re: Dual Momentum Investing
« Reply #305 on: April 28, 2015, 11:48:17 AM »
Please articulate the underlying fundamentals and reason/logic of your "solidi nvestment strategy."  I don't believe you've done that yet.

At the risk of getting sucked into an irrelevant discussion earlier that sol was trying to avoid with the "why does it matter?" ...Sure.  Here's an example of one I find compelling:
http://www.gocurrycracker.com/path-100-equities/

I'm less sold on JLCollins' investment strategy/AA, mainly because I'm not a huge fan of REITs (though those were in his earlier ones, I believe he cut them from his latest AA), and I think International is more important than he does.

But it's still a good example of what I'd consider a "solid investment strategy."

I think earlier on your blog you made some decent arguments for certain AAs, but I don't feel like going to dig for them.

Hope that helps!  Now maybe we can get back on topic.  :)
« Last Edit: April 28, 2015, 11:49:49 AM by arebelspy »
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milesdividendmd

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Re: Dual Momentum Investing
« Reply #306 on: April 28, 2015, 11:53:00 AM »
So your solid strategy is 100 % equities?  Fair enough.

But what is your "reason/logic" that led you to this unique allocation?  You have claimed that your asset allocation flows from a priori knowledge.  That is what is missing here.

Please share your a priori knowledge from which this AA flows.
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arebelspy

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Re: Dual Momentum Investing
« Reply #307 on: April 28, 2015, 11:59:04 AM »
miles, you seem to only want to address me.  Why is that?

Dodge had a post on the previous page laying out the reason/logic for index funds that was conveniently ignored.

Other people--arguing the same things I am--are posting, and you seem offended when they address your questions targeted at me, even calling sol out for it at one point.

Do you have an issue with me?  If so, fucking clear your chest and let's move past that so we can have reasonable discussion.  But jesus, get over it one way or another. 
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sol

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Re: Dual Momentum Investing
« Reply #308 on: April 28, 2015, 12:03:43 PM »
Quote from: arebelspy
At the risk of getting sucked into an irrelevant discussion earlier that sol was trying to avoid with the "why does it matter?" ...Sure.

I was trying to avoid it because I get the feeling miles would rather attack your strategy than defend his own.  I think he's struggling to justify dual momentum on a theoretical basis, so rather than try he wants to try to say that the alternatives may also have shaky theoretical bases.

Which would be a fine strategy for argument if this were a thread about choosing between investment strategies, which I don't think it is.

But now that ars has broken the seal, I'll play along.  Miles,  my logic for choosing passive index investing is that it is guaranteed to track the market at the lowest possible cost.  Not outperform. Nothing to do with past performance. Not based on any preconceived notion of market behavior.  Just capture everything the market does, as a mathematical certainty, at minimum cost.

If you would like to attack the theoretical basis for numerical averaging, I'm all ears.

arebelspy

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Re: Dual Momentum Investing
« Reply #309 on: April 28, 2015, 12:04:53 PM »
Wait, sol, let me post it.  Maybe he'll respond then.

Quote
Miles,  my logic for choosing passive index investing is that it is guaranteed to track the market at the lowest possible cost.  Not outperform. Nothing to do with past performance. Not based on any preconceived notion of market behavior.  Just capture everything the market does, as a mathematical certainty, at minimum cost.

If you would like to attack the theoretical basis for numerical averaging, I'm all ears.

I agree though.  I don't understand how attacking some other strategy boosts Dual Momentum, which is why I asked after posting it if we could get back on topic.
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Re: Dual Momentum Investing
« Reply #310 on: April 28, 2015, 12:06:17 PM »
Wait, sol, let me post it.  Maybe he'll respond then.
Ooooooooh :o

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Re: Dual Momentum Investing
« Reply #311 on: April 28, 2015, 12:14:20 PM »
ARS,

I have absolutely no issue with you, personally.  Honest.

I am interested (and skeptical) of your claim that your chosen investment strategy comes from a priori knowledge, whhich I find to be very interesting, and admittedly somewhat unbelievable.

I've stated my theory that we choose our strategies based on probabilistic estimations of the what we think gives us the highest chance of future success.  And that the only rational way to calculate such a probability is to look to the past.

I think indexing is smart because it is cheap and it works better than active strategies 80 % of the time.  You criticized this method of choosing a strategy as a posteriori logic.

I am honestlyinterested in the a priori logic that informs your strategy.

That's it.

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arebelspy

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Re: Dual Momentum Investing
« Reply #312 on: April 28, 2015, 12:15:14 PM »
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arebelspy

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Re: Dual Momentum Investing
« Reply #313 on: April 28, 2015, 12:18:42 PM »
I've stated my theory that we choose our strategies based on probabilistic estimations of the what we think gives us the highest chance of future success. 

Yes, this is now explicit.

Earlier, before you had made that clear, in a PM to another poster (initiated by him), trying to figure out where you were coming from, I stated:
Quote
I think I got a hint of his thinking though from his latest post regarding index funds.  Apparently the only way he invests is based on back testing and assuming everyone invests solely on what they think will beat the market.

He only indexes because he thinks it can beat the market via lowest fees.

If that's your perspective, then Dual Momentum having no rationale wouldn't bother you, because it's worked before, and that's good enough.

So he's having trouble understanding why it's not good enough for us.  At least that's my impression at this point.

So let me be clear: no, not everyone invests solely based on whatever has beaten the market in the past in an attempt to beat it in the future.

I'd have thought Dodge's and sol's posts (among others) would have given you ample other reasons why one might index other than back testing.  No?
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brooklynguy

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Re: Dual Momentum Investing
« Reply #314 on: April 28, 2015, 12:19:05 PM »
But now that ars has broken the seal, I'll play along.  Miles,  my logic for choosing passive index investing is that it is guaranteed to track the market at the lowest possible cost.  Not outperform. Nothing to do with past performance. Not based on any preconceived notion of market behavior.  Just capture everything the market does, as a mathematical certainty, at minimum cost.

Ok, I'll play too.  I follow a passive indexing strategy for the same reason, coupled with the fact that my shareholdings are not just pieces of paper (or digital entries in a Vanguard mainframe), but representational ownership in underlying businesses, each of which is competing to create wealth, and I therefore believe that the market will in the long term go up.

arebelspy

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Re: Dual Momentum Investing
« Reply #315 on: April 28, 2015, 12:31:46 PM »
coupled with the fact that my shareholdings are not just pieces of paper (or digital entries in a Vanguard mainframe), but representational ownership in underlying businesses, each of which is competing to create wealth, and I therefore believe that the market will in the long term go up.

This is the other half of the logic behind "why total market"--index fund reasoning as explained above, and "why equities" because of belief in the growth of businesses, competition, capitalism, etc. (whatever logical arguments you find compelling).

I'd question a 100% cash strategy because of the logical problem of inflation.   I can accept a mixed bonds/stock AA for reasons of rebalancing, volatility, efficient frontiers, etc.

Heck, even the permenent portfolio has some good logic/rationale: picking uncorrelated assets that should--in theory--perform well in any given environment.  And it has performed well. The theory drives it, and the back test proves it.

But there should be some logic and theory to a strategy that one can explain. 

Market timing doesn't generally have this, which is why I'm skeptical that it will continue to work in the future (not that any of the above certainly will, but there's at least compelling reasons to believe they will).
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milesdividendmd

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Re: Dual Momentum Investing
« Reply #316 on: April 28, 2015, 12:32:55 PM »
Quote from: arebelspy
At the risk of getting sucked into an irrelevant discussion earlier that sol was trying to avoid with the "why does it matter?" ...Sure.

I was trying to avoid it because I get the feeling miles would rather attack your strategy than defend his own.  I think he's struggling to justify dual momentum on a theoretical basis, so rather than try he wants to try to say that the alternatives may also have shaky theoretical bases.

Which would be a fine strategy for argument if this were a thread about choosing between investment strategies, which I don't think it is.

But now that ars has broken the seal, I'll play along.  Miles,  my logic for choosing passive index investing is that it is guaranteed to track the market at the lowest possible cost.  Not outperform. Nothing to do with past performance. Not based on any preconceived notion of market behavior.  Just capture everything the market does, as a mathematical certainty, at minimum cost.

If you would like to attack the theoretical basis for numerical averaging, I'm all ears.

This is an elegant and intelligent defense of your strategy.  I would expect nothing less from you Sol.

I wholeheartedly agree that Indexing's prime strength is that it is very, very, cheap.

Here is where I think your logic may have some holes in it....  (But not knowing your asset allocation I can't be sure.)

This is what the global financial market really looks like....

24 %  foreign stocks
21% foreign bonds
19% investment grade corporate bonds
16%  US stocks
10% US gov bonds
5% REITS
2% TIPS
2% EM bonds
1% high yield bonds

(Source:  http://z822j1x8tde3wuovlgo7ue15.wpengine.netdna-cdn.com/wp-content/uploads/2014/08/GFAP3.png)

If you want to match the market, there is no cheaper way than to buy cap weighted ETFs for  each of these assets and in these exact proportions.  You would never have to rebalance, (aside from the small problem of dividends.)

If your goal is truly to match the market in the cheapest way possible, and your allocation is dramatically different from above, then the question I have is why are you deviating from your underlying logic?




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frugalnacho

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Re: Dual Momentum Investing
« Reply #317 on: April 28, 2015, 12:41:58 PM »
If your goal is truly to match the market in the cheapest way possible, and your allocation is dramatically different from above, then the question I have is why are you deviating from your underlying logic?

risk tolerance

brooklynguy

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Re: Dual Momentum Investing
« Reply #318 on: April 28, 2015, 12:46:41 PM »
Just depends what "market" you want to match.  If you set the parameters broadly enough, you can further expand the market (and its associated breakdown) to include beanie babies, alpacas, tulip bulbs, cannabis plants, etc.

If perfectly matching the "global financial market" is your goal, then the asset allocation for your passive index investments currently needs to match the breakdown you provided (but in that case the associated costs are going to go up).

My goal is for 80% of my portfolio to match the U.S. stock market, and for 20% of my portfolio to match the international (ex-U.S.) stock markets, because I believe that is a reasonable exposure (only one of many possible reasonable exposures) to capture the gains that the worldwide equity markets will probably provide in the long-run for the reasons stated above.

milesdividendmd

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Re: Dual Momentum Investing
« Reply #319 on: April 28, 2015, 12:49:09 PM »
If your goal is truly to match the market in the cheapest way possible, and your allocation is dramatically different from above, then the question I have is why are you deviating from your underlying logic?

risk tolerance

Please expand.
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Re: Dual Momentum Investing
« Reply #320 on: April 28, 2015, 12:49:48 PM »
Just depends what "market" you want to match.  If you set the parameters broadly enough, you can further expand the market (and its associated breakdown) to include beanie babies, alpacas, tulip bulbs, cannabis plants, etc.

If perfectly matching the "global financial market" is your goal, then the asset allocation for your passive index investments currently needs to match the breakdown you provided (but in that case the associated costs are going to go up).

My goal is for 80% of my portfolio to match the U.S. stock market, and for 20% of my portfolio to match the international (ex-U.S.) stock markets, because I believe that is a reasonable exposure (only one of many possible reasonable exposures) to capture the gains that the worldwide equity markets will probably provide in the long-run for the reasons stated above.

So what is your a priori logic for 80/20?

Is it not a coincidence that you are 100 % in the asset class that has returned the most historically?
« Last Edit: April 28, 2015, 12:51:48 PM by milesdividendmd »
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frugalnacho

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Re: Dual Momentum Investing
« Reply #321 on: April 28, 2015, 12:56:15 PM »
If your goal is truly to match the market in the cheapest way possible, and your allocation is dramatically different from above, then the question I have is why are you deviating from your underlying logic?

risk tolerance

Please expand.

Why would I go 19% in corporate bonds, and 10% in gov bonds, etc?  I would rather take on more risk for more reward.  As long as you understand the risks you are assuming I see no fundamental problem deviating your AA from the global break down you posted into one that has higher risk/reward, ie one that is concentrated much more in equities.

brooklynguy

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Re: Dual Momentum Investing
« Reply #322 on: April 28, 2015, 01:00:10 PM »
So what is your a priori logic for 80/20?

I have no a priori justification for an 80/20 split over, say, a 78/22 split, or 90/10, or 60/40.  I just know that I want the majority of my exposure to be to the US stock market, because the US has the most robust and transparent equity market in the world, and it will not expose me, as a US resident, to currency risk.  So I picked an 80/20 allocation because it seems as good as any other.

But all of this is beside the point.  This is all in service of providing an explanation for why there should be some logic behind a strategy, beyond the fact that "it worked in the past."

No-one should rely on an every-7th-Tuesday-type strategy that happened to work in the past (even if it did so in every market in the world over the course of the past five centuries), because there's no reason to believe it should continue to work in the future.

We've been asking for the reasons to believe that dual momentum will continue to work in the future, and some explanations have been put forward.  So we should turn our attention back to discussing those.

milesdividendmd

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Re: Dual Momentum Investing
« Reply #323 on: April 28, 2015, 01:13:29 PM »
So what is your a priori logic for 80/20?

I have no a priori justification for an 80/20 split over, say, a 78/22 split, or 90/10, or 60/40.  I just know that I want the majority of my exposure to be to the US stock market, because the US has the most robust and transparent equity market in the world, and it will not expose me, as a US resident, to currency risk.  So I picked an 80/20 allocation because it seems as good as any other.

But all of this is beside the point.  This is all in service of providing an explanation for why there should be some logic behind a strategy, beyond the fact that "it worked in the past."

No-one should rely on an every-7th-Tuesday-type strategy that happened to work in the past (even if it did so in every market in the world over the course of the past five centuries), because there's no reason to believe it should continue to work in the future.

We've been asking for the reasons to believe that dual momentum will continue to work in the future, and some explanations have been put forward.  So we should turn our attention back to discussing those.

I was asked for the story behind momentum/trendfollowing as I understand it and I gave it:

Human performance chasing and the flow of capital in and out of markets based on human performance chasing.

You can agree or disagree with my story, of course, that's why we all have different approaches.

But to claim that we choose our strategies based on a priori theories seems suspicious to me.

In my view, passive investing continues to grow in popularity for one reason and one reason only:  It works.

People are not more logical or better able to come up with a priori theories of how to invest their money than they were in 1985.  The difference is that we have decades of evidence that indexing outperforms most other strategies.

You can say that you are overweight equities because of some underlying logic about risk or the inevitability of corporate growth, but my suspicion is that it is NOT coincidence that everyone here over weights the asset class that has historically performed the best.

It is hard for me to understand my own motivations let alone yours, so I have no idea what drives you, I will admit. but that is how I see it.

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frugalnacho

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Re: Dual Momentum Investing
« Reply #324 on: April 28, 2015, 01:15:23 PM »
If your goal is truly to match the market in the cheapest way possible, and your allocation is dramatically different from above, then the question I have is why are you deviating from your underlying logic?

risk tolerance

Why do you think that equities will promise more reward than all other asset classes going forward?  There are riskier investments.  For example  junk bonds for the lowest rated companies in Greece would be a a riskier play than investing in the US equity market.


Please expand.

Why would I go 19% in corporate bonds, and 10% in gov bonds, etc?  I would rather take on more risk for more reward.  As long as you understand the risks you are assuming I see no fundamental problem deviating your AA from the global break down you posted into one that has higher risk/reward, ie one that is concentrated much more in equities.

Because historically they have, along with the underlying reasons already laid out in this thread that explain why they have had (and I expect them to continue to have) better returns.

I've also never understood the way risk was used in reference to investments.  It seems that it is always used in reference to volatility, and the short to mid term risk of losing money, but not the long term.  Over long time frames that risk appears to melt away, paradoxically making investing in higher risk assets actually less risk. 

I am not familiar enough with companies in greece to feel comfortable taking on that risk of junk bonds.

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Re: Dual Momentum Investing
« Reply #325 on: April 28, 2015, 01:20:40 PM »
In my view, passive investing continues to grow in popularity for one reason and one reason only:  It works.

Not only it works, but nearly everyone understand why it works.   Once you accept the fact that professional money managers are unable to consistently beat the market (which I do, I have seen enough evidence to convince me of this), then it makes perfect logical sense that you can invest and compound all that money that formerly went to active managers.  You aren't getting a free lunch, you just stop giving active fund managers their free lunch.

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Re: Dual Momentum Investing
« Reply #326 on: April 28, 2015, 01:24:06 PM »
If your goal is truly to match the market in the cheapest way possible, and your allocation is dramatically different from above, then the question I have is why are you deviating from your underlying logic?

risk tolerance

Why do you think that equities will promise more reward than all other asset classes going forward?  There are riskier investments.  For example  junk bonds for the lowest rated companies in Greece would be a a riskier play than investing in the US equity market.


Please expand.

Why would I go 19% in corporate bonds, and 10% in gov bonds, etc?  I would rather take on more risk for more reward.  As long as you understand the risks you are assuming I see no fundamental problem deviating your AA from the global break down you posted into one that has higher risk/reward, ie one that is concentrated much more in equities.

Because historically they have, along with the underlying reasons already laid out in this thread that explain why they have had (and I expect them to continue to have) better returns.

I've also never understood the way risk was used in reference to investments.  It seems that it is always used in reference to volatility, and the short to mid term risk of losing money, but not the long term.  Over long time frames that risk appears to melt away, paradoxically making investing in higher risk assets actually less risk. 

I am not familiar enough with companies in greece to feel comfortable taking on that risk of junk bonds.

Right.  Because historically they have.

Logic would say that if you believe in a perfect risk reward relationship that you would invest in the riskiest assets if you want the highest rewards.  But you don't do that because some assets have higher risk adjusted rewards relative to others historically.

That is my point precisely.

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Re: Dual Momentum Investing
« Reply #327 on: April 28, 2015, 01:24:34 PM »
Taking a percentage stake in all companies across the world, is in no way comparable to your Dual Momentum strategy.  They are on completely different levels.  One is a grabbing a percentage of the total world output/productivity.  The other is an attempt to beat millions of participants in a competition, based on what worked against those participants in the past.
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Re: Dual Momentum Investing
« Reply #328 on: April 28, 2015, 01:31:59 PM »
Right.  Because historically they have.

Logic would say that if you believe in a perfect risk reward relationship that you would invest in the riskiest assets if you want the highest rewards.  But you don't do that because some assets have higher risk adjusted rewards relative to others historically.

That is my point precisely.

You are missing the second half of my sentence.  It's not only that they historically have, but it makes perfect sense to me why they have historically.  It's not an anomaly that leaves me scratching my head.  It's a perfectly logical argument that they should have higher returns, and history has merely confirmed that logical argument imo.

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Dual Momentum Investing
« Reply #329 on: April 28, 2015, 01:33:49 PM »
Taking a percentage stake in all companies across the world, is in no way comparable to your Dual Momentum strategy.  They are on completely different levels.  One is a grabbing a percentage of the total world output/productivity.  The other is an attempt to beat millions of participants in a competition, based on what worked against those participants in the past.

Kind of a strawman argument here Dodge. I'm not arguing that the strategies are the same.

You make judgemental presumptions about my motivation to adopt this strategy which are in fact incorrect.

And your comment still doesn't Address the amazing coincidence that everyone here over weights the asset class that has been historically the most successful.
« Last Edit: April 28, 2015, 01:40:51 PM by milesdividendmd »
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Dual Momentum Investing
« Reply #330 on: April 28, 2015, 01:52:16 PM »
Oh. I didn't miss it at all. I just didn't find it very convincing or worthy of further discussion .

The problem is that I have no way of judging what makes sense to you personally or not.

What makes sense to me is the fact that everyone over weights a certain asset class with favorable risk-adjusted return characteristics is in no way a coincidence.

To me that is convincing evidence of performance chasing. Much more convincing than say everyone coming up with their own story a priori which leads them to the exact same conclusion.
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Re: Dual Momentum Investing
« Reply #331 on: April 28, 2015, 01:54:32 PM »
Oh. I didn't miss it at all. I just didn't find it very convincing or worthy of further discussion .

The problem is that I have no way of judging what makes sense to you personally or not.

What makes sense to me is the fact that everyone over weights a certain asset class with favorable risk-adjusted return characteristics is in no way a coincidence.

To me that is convincing evidence of performance chasing. Much more convincing than say everyone coming up with their own story a priori which leads them to the exact same conclusion.

And if someone has never run a back test on their particular AA, because that's not how they chose it?
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Re: Dual Momentum Investing
« Reply #332 on: April 28, 2015, 01:58:46 PM »
Oh. I didn't miss it at all. I just didn't find it very convincing or worthy of further discussion .

The problem is that I have no way of judging what makes sense to you personally or not.

What makes sense to me is the fact that everyone over weights a certain asset class with favorable risk-adjusted return characteristics is in no way a coincidence.

To me that is convincing evidence of performance chasing. Much more convincing than say everyone coming up with their own story a priori which leads them to the exact same conclusion.

And if someone has never run a back test on their particular AA, because that's not how they chose it?

If 100 people had no knowledge of the historical return characteristics of several different asset classes and were asked to come up with an ideal asset allocation for themselves based on what made the most sense, I would not expect everyone to choose to overweight the asset class that in fact had the most favorable return characteristics.  Would you?
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Re: Dual Momentum Investing
« Reply #333 on: April 28, 2015, 02:09:12 PM »
Miles, the argument that everyone engages in performance chasing and, as a factual matter, picked their chosen investment strategy solely on the basis of past performance, is completely irrelevant.  As I said earlier, let's just assume for the sake of argument that you are correct that the one and only reason anyone in the world chooses to passively index is because history tells us that it worked in the past.  We can still come up with logical, reasoned explanations for why those strategies that worked in the past will continue to work in the future.

The same can't be said about an every-7th-Tuesday strategy.

We started down this road because Rebs and others asked whether there are logical reasons to believe that dual momentum will continue to work, or whether instead it is equivalent to an every-7th-Tuesday strategy.

Explanations for why we should expect dual momentum to continue to work in the future have now been put forward.  We can all debate whether or not those reasons are compelling.  But I don't understand how you can continue fail to see why we require there to be logical reasons to support our investment strategy.  If you found an every-7th-Tuesday strategy that backtested as well as dual momentum, would you follow it?

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Re: Dual Momentum Investing
« Reply #334 on: April 28, 2015, 02:12:31 PM »
If 100 people had no knowledge of the historical return characteristics of several different asset classes and were asked to come up with an ideal asset allocation for themselves based on what made the most sense, I would not expect everyone to choose to overweight the asset class that in fact had the most favorable return characteristics.  Would you?

If they had no knowledge of historical returns, and they all chose a similar asset class that also had high returns, I'd say that the emperical returns matched the logical reasons for why they chose it.

Miles, the argument that everyone engages in performance chasing and, as a factual matter, picked their chosen investment strategy solely on the basis of past performance, is completely irrelevant.

Besides being irrelevant, I just can't fathom it as true.  If everyone were doing that, why don't we all have the same AA, the one that has had the best returns?

Clearly something more than just performance chasing is in play for almost everyone.
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Re: Dual Momentum Investing
« Reply #335 on: April 28, 2015, 02:20:22 PM »

Taking a percentage stake in all companies across the world, is in no way comparable to your Dual Momentum strategy.  They are on completely different levels.  One is a grabbing a percentage of the total world output/productivity.  The other is an attempt to beat millions of participants in a competition, based on what worked against those participants in the past.

Kind of a strawman argument here Dodge. I'm not arguing that the strategies are the same.

You make judge mental presumptions about my motivation to adopt this strategy which are in fact incorrect.

And your comment still doesn't Address the amazing coincidence that everyone here over weights the asset class that has been historically the most successful.

If you acknowledge the strategies aren't comparable, then it should be clear that your current line of questioning is invalid.

As companies make money, people who own percentage stakes in those companies, make money.  Currently the easiest way to grab a percentage of the total world output/productivity is to own percentage stakes in companies.  Correlation does not imply causation:

------------------------------
Owning the total world output/productivity, is strongly correlated with choosing an asset class that is historically successful.
Therefore, the desire to be historically successful causes people to own the total world output/productivity.
------------------------------

The above example commits the correlation-implies-causation fallacy, as it prematurely concludes that people have a desire to choose an asset class that's historically successful, and that causes them to own the total world output/productivity.  A more plausible explanation is that owning the total world output/productivity is the best way to capture economic growth, so they end up choosing an asset class that's historically successful, which thereby gives rise to a correlation.
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Re: Dual Momentum Investing
« Reply #336 on: April 28, 2015, 02:48:25 PM »

Taking a percentage stake in all companies across the world, is in no way comparable to your Dual Momentum strategy.  They are on completely different levels.  One is a grabbing a percentage of the total world output/productivity.  The other is an attempt to beat millions of participants in a competition, based on what worked against those participants in the past.

Kind of a strawman argument here Dodge. I'm not arguing that the strategies are the same.

You make judge mental presumptions about my motivation to adopt this strategy which are in fact incorrect.

And your comment still doesn't Address the amazing coincidence that everyone here over weights the asset class that has been historically the most successful.

If you acknowledge the strategies aren't comparable, then it should be clear that your current line of questioning is invalid.

As companies make money, people who own percentage stakes in those companies, make money.  Currently the easiest way to grab a percentage of the total world output/productivity is to own percentage stakes in companies.  Correlation does not imply causation:

------------------------------
Owning the total world output/productivity, is strongly correlated with choosing an asset class that is historically successful.
Therefore, the desire to be historically successful causes people to own the total world output/productivity.
------------------------------

The above example commits the correlation-implies-causation fallacy, as it prematurely concludes that people have a desire to choose an asset class that's historically successful, and that causes them to own the total world output/productivity.  A more plausible explanation is that owning the total world output/productivity is the best way to capture economic growth, so they end up choosing an asset class that's historically successful, which thereby gives rise to a correlation.

Your argument is lost on me here Dodge.  I can't even respond because I have no idea what you are attempting to communicate.
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Re: Dual Momentum Investing
« Reply #337 on: April 28, 2015, 03:01:45 PM »
Quote
If they had no knowledge of historical returns, and they all chose a similar asset class that also had high returns, I'd say that the emperical returns matched the logical reasons for why they chose it.

That's probably true and it is also an answer to a completely unrelated question.  The question is do you think they would choose the same thing if given no access to historical records?  I don't.  That is a highly unlikely outcome.

Quote
If everyone were doing that, why don't we all have the same AA, the one that has had the best returns?

Clearly something more than just performance chasing is in play for almost everyone.

No one is arguing that everyone uses exclusively performance chasing to design their portfolios.  What  I am arguing is that people generally construct their portfolios based on their best guess of the future performance of assets.  And their best guess of the future performance of assets is highly influenced by the past performance of assets.

ie.  the dominant driver of yours and my and most peoples portfolio is NOT a priori theories of market structure as you seem to believe, it is a posteriori.  That's it.

We all have our own risk tolerance and picadillos and biases, and we all have shiny stories that we use to justify our decisions.  So we all have different approaches. 

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Re: Dual Momentum Investing
« Reply #338 on: April 28, 2015, 03:04:23 PM »
Your argument is lost on me here Dodge.  I can't even respond because I have no idea what you are attempting to communicate.

I followed Dodge's argument just fine and think it can be summarized as follows:  there is a high correlation between the asset allocations people choose and the high historical performance of those asset allocations, and from that correlation you (improperly) concluded that the historical performance caused the choice of allocation.  An equally valid explanation would be that a third factor--the underlying cause of the asset allocation's outperformance--also caused people to choose that allocation.

Was my question about the every-7th-Tuesday strategy also lost on you?  Because I genuinely believe if you think about that question, you will see the point we've been trying to make.

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Re: Dual Momentum Investing
« Reply #339 on: April 28, 2015, 03:52:56 PM »
Miles, the argument that everyone engages in performance chasing and, as a factual matter, picked their chosen investment strategy solely on the basis of past performance, is completely irrelevant.  As I said earlier, let's just assume for the sake of argument that you are correct that the one and only reason anyone in the world chooses to passively index is because history tells us that it worked in the past.  We can still come up with logical, reasoned explanations for why those strategies that worked in the past will continue to work in the future.

The same can't be said about an every-7th-Tuesday strategy.

We started down this road because Rebs and others asked whether there are logical reasons to believe that dual momentum will continue to work, or whether instead it is equivalent to an every-7th-Tuesday strategy.

Explanations for why we should expect dual momentum to continue to work in the future have now been put forward.  We can all debate whether or not those reasons are compelling.  But I don't understand how you can continue fail to see why we require there to be logical reasons to support our investment strategy.  If you found an every-7th-Tuesday strategy that backtested as well as dual momentum, would you follow it?


Brooklyn,

The point that indexers performance chase too is in no way a defense of dual momentum.  Others (including you) have made the claim that indexing is more rational because it springs de novo from a rational story a priori (ie irrespective of past performance.)  I think that this is demonstrably false, and have made my case for this because:

1.  Indexers justify their choice by saying that they want to invest in the "whole market" and not try to beat the market, but they don't invest in the whole market at all.  They overweight some assets and underweight others.
2.  Oddly they overweight assets not based on their actual risk, (based on their belief in risk/reward) but based on their historical efficiencies (ie risk adjusted returns).

In other words I am arguing that their justification for selecting assets (a priori beliefs) is demonstrably false.

As to the logic of dual momentum, how many times must I re-articulate my "story?"

It has to do with the persistence human performance chasing, and the flows of capital in and out of funds based on past performance.

Maybe it's not a convincing story for you.  Fair enough.  It's obviously very convincing to me.  To each his own.

As to the every 7th tuesday question, I can come up with no plausible story for that one, so there's one difference.

Furthermore I do put faith in robustness testing.  So I would expect such a theory to fall apart after it was first described, or I would expect it to not be present EVERYWHERE in out of sample testing.

Both momentum and trend following have proven to be uniquely rubust in out of sample testing. 

So  for the last time, that is my story. 

Momentum/trendfollowing jibe with my understanding of how markets work.  More importantly they have been present everywhere they have been looked for and has persisted long since they were first described.

« Last Edit: April 28, 2015, 04:14:38 PM by milesdividendmd »
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Re: Dual Momentum Investing
« Reply #340 on: April 28, 2015, 08:14:57 PM »
In other words I am arguing that their justification for selecting assets (a priori beliefs) is demonstrably false.

As to the logic of dual momentum, how many times must I re-articulate my "story?"

It has to do with the persistence human performance chasing, and the flows of capital in and out of funds based on past performance.

Please elaborate.

"It has to do with..." is quite vague.
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Re: Dual Momentum Investing
« Reply #341 on: April 28, 2015, 08:43:33 PM »
Edit:  I pasted this reply into # 347 to make a 2 part post more cohesive...

« Last Edit: April 28, 2015, 09:18:53 PM by milesdividendmd »
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Re: Dual Momentum Investing
« Reply #342 on: April 28, 2015, 08:59:53 PM »
What is the main driving point for most of us on this forum to choose an 80/20 split? And the large weighting toward US stocks? I understand that the idea is that stock markets tend to go up in general, and I believe we see that in back testing as well. But not all stock markets go up equally. What is to stop the US market from stagnating for 20 years while other markets are the only ones growing?

What other than the fact that we look at the fact that the US has previously done well, so it will continue to dominate drives us to heavily weight our portfolios toward US stock? That we're a free nation? We have good economic policy? We have smarter people?

If we to truly believe in indexing, wouldn't it be more consistent to index against all available markets?
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Re: Dual Momentum Investing
« Reply #343 on: April 28, 2015, 09:06:16 PM »
What is the main driving point for most of us on this forum to choose an 80/20 split? And the large weighting toward US stocks? I understand that the idea is that stock markets tend to go up in general, and I believe we see that in back testing as well. But not all stock markets go up equally. What is to stop the US market from stagnating for 20 years while other markets are the only ones growing?

What other than the fact that we look at the fact that the US has previously done well, so it will continue to dominate drives us to heavily weight our portfolios toward US stock? That we're a free nation? We have good economic policy? We have smarter people?

If we to truly believe in indexing, wouldn't it be more consistent to index against all available markets?

Not everyone here is 100% us stocks.

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Re: Dual Momentum Investing
« Reply #344 on: April 28, 2015, 09:07:40 PM »
Personally I'd think investing based on the past--rather than future--would be short sighted, if you actually thought things were predictable.

In other words, I don't think people are weighting towards the U.S. because it has done well in the past, but believe that Brazil will outperform it in the future.  They're weighting towards U.S. stocks and companies because that's what they think will perform well in the future.  The fact that XYZ company did well 30 years ago has little bearing on their future prospects.  But if their future prospects seem bright, that would be relevant.

Since I can't time that, but do think U.S. companies have an edge in many ways, it would make sense to tilt towards the U.S.--again, not because of past performance, but due to my reasonings about the state of the world today.

I have no reason to think I can predict some other specific countries or companies that will outperform, so I'll just stick with the ones that are positioned to keep doing what they're doing.
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Re: Dual Momentum Investing
« Reply #345 on: April 28, 2015, 09:08:35 PM »
What is the main driving point for most of us on this forum to choose an 80/20 split? And the large weighting toward US stocks? I understand that the idea is that stock markets tend to go up in general, and I believe we see that in back testing as well. But not all stock markets go up equally. What is to stop the US market from stagnating for 20 years while other markets are the only ones growing?

What other than the fact that we look at the fact that the US has previously done well, so it will continue to dominate drives us to heavily weight our portfolios toward US stock? That we're a free nation? We have good economic policy? We have smarter people?

If we to truly believe in indexing, wouldn't it be more consistent to index against all available markets?

Not everyone here is 100% us stocks.

I'd be surprised if anyone who posted in this thread is 100% US stocks.

But it's a coherent viewpoint to hold, which miles was asking for (an AA that had rationale behind it).
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Re: Dual Momentum Investing
« Reply #346 on: April 28, 2015, 09:13:40 PM »
I don't really know how else to say it ARS.

There are about 15 heuristics in Kahneman's thinking fast and slow that explain our inexorable performance chasing tendencies.

Off the top of my head.

Recency bias (our consistent non statistical  overemphasis on the importance of recent events (ie winners/losers.)
Loss aversion (our drive to avoid loss at all cost ((which makes it hard to buy recent losers and sell recent winners.))
Representativeness. (Our need to attribute causality to that which reinforces our own non statistical biases.  ( this stock made a killing for me, proving I'm smart, which again makes me attached to its ongoing performance  which makes it hard for me to sell it. ))

Which are all subtle aspects in our cognitive make up which make it hard to buy recent losers and easy to buy recent winners.

And when you get to the institutional level, the effects are only amplified. Money flows towards recent winners, because if you are paying someone 2 and 20 to outperform the market they had better have proof of their recent outperformance.

I recognized this tendency in myself even when it came time to rebalance my buy and hold portfolio.

It is non statistical, and illogical, and powerful, and it shades almost every trade that people make,  which in combination makes price momentum. A tendency for recent price movement to be perpetuated.

It could be that I am exceptionally illogical or greedy or non statistical in my thinking, who knows?

But that's how I see the market. (At least after having become aware of the momentum effect.)

Performance chasing!

All of which only describes relative strength momentum.

Trend following and absolute momentum, on the other hand,  are 2 different methods of accomplishing the same thing, namely finding a reproducible signal that gets you on the side line during bear markets.

If the price of your index is below its 200 day moving average or has performed worse than cash over the last 3-12 months it tells you the same thing:  you are probably in a bear market. It's not 100% of course, but its pretty close,  and bear markets in anything almost always last several years and can eat away as much as 80% of equity value in a 100% equity portfolio (and that is only the biggest bear market to date, no reason we can't have a greater depression in the future.)

This is a consistent  pattern of all US bear and most foreign bear markets to date, and I don't honestly know why markets always take years to right themselves, I assume it has to do with size effects and the consequent latency from the time that economies and governments recognize that they are in trouble, to the time that corrective action begins to stop the bleeding, but the fact that trend following always but always minimizes max drawdowns in diverse markets and asset types, in backtesting of 10 years or more, is enough empirical evidence for me.  I don't need a better story than that.  Call it technical trading if you like.  I call it a smart probabilistic play, and  I am willing to put my penny down (and have.)

The cost is tracking error and whipsaw risk, which generally means that its a coin flip whether or not the trend follower will outperform in a bull market (relative momentum helps here, of course). 

I don't see this play as much different from overweighting equities in a buy and hold portfolio.  Equities have always outperformed superiorly in 30 year periods in the past, so it's smart to imagine that this trend will persist, whether or not you believe in the unstoppable intrinsic wealth expanding prowess of corporations.

« Last Edit: April 28, 2015, 09:25:30 PM by milesdividendmd »
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milesdividendmd

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Re: Dual Momentum Investing
« Reply #347 on: April 28, 2015, 09:22:50 PM »
What is the main driving point for most of us on this forum to choose an 80/20 split? And the large weighting toward US stocks? I understand that the idea is that stock markets tend to go up in general, and I believe we see that in back testing as well. But not all stock markets go up equally. What is to stop the US market from stagnating for 20 years while other markets are the only ones growing?

What other than the fact that we look at the fact that the US has previously done well, so it will continue to dominate drives us to heavily weight our portfolios toward US stock? That we're a free nation? We have good economic policy? We have smarter people?

If we to truly believe in indexing, wouldn't it be more consistent to index against all available markets?

Even though it goes against my own "performance chasing" thesis, I think the main driver of choosing an equity allocation weighted towards America, here in America is  simple home country bias.  All countries are guilty of this one.  Any Canadians want to volunteer how much they have invested in canadian stocks?
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arebelspy

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Re: Dual Momentum Investing
« Reply #348 on: April 28, 2015, 09:32:00 PM »
What is the main driving point for most of us on this forum to choose an 80/20 split? And the large weighting toward US stocks? I understand that the idea is that stock markets tend to go up in general, and I believe we see that in back testing as well. But not all stock markets go up equally. What is to stop the US market from stagnating for 20 years while other markets are the only ones growing?

What other than the fact that we look at the fact that the US has previously done well, so it will continue to dominate drives us to heavily weight our portfolios toward US stock? That we're a free nation? We have good economic policy? We have smarter people?

If we to truly believe in indexing, wouldn't it be more consistent to index against all available markets?

Even though it goes against my own "performance chasing" thesis, I think the main driver of choosing an equity allocation weighted towards America, here in America is  simple home country bias.  All countries are guilty of this one.  Any Canadians want to volunteer how much they have invested in canadian stocks?

But there can be some logic/sense in tilting your allocation towards companies based in your home country.  If you buy goods and services from them, and the costs of those goods rise, hopefully that rise will be offset by their stock rising also (as the companies are making more money).  Tying your income to your expenses can make some logical sense, even if it doesn't backtest as nicely as if you invested in another country, if you don't find any compelling reason to favor that country going forward, then tilting towards your own country is as good as, or better, than any.
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milesdividendmd

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Re: Dual Momentum Investing
« Reply #349 on: April 28, 2015, 09:42:07 PM »
What is the main driving point for most of us on this forum to choose an 80/20 split? And the large weighting toward US stocks? I understand that the idea is that stock markets tend to go up in general, and I believe we see that in back testing as well. But not all stock markets go up equally. What is to stop the US market from stagnating for 20 years while other markets are the only ones growing?

What other than the fact that we look at the fact that the US has previously done well, so it will continue to dominate drives us to heavily weight our portfolios toward US stock? That we're a free nation? We have good economic policy? We have smarter people?

If we to truly believe in indexing, wouldn't it be more consistent to index against all available markets?

Even though it goes against my own "performance chasing" thesis, I think the main driver of choosing an equity allocation weighted towards America, here in America is  simple home country bias.  All countries are guilty of this one.  Any Canadians want to volunteer how much they have invested in canadian stocks?

But there can be some logic/sense in tilting your allocation towards companies based in your home country.  If you buy goods and services from them, and the costs of those goods rise, hopefully that rise will be offset by their stock rising also (as the companies are making more money).  Tying your income to your expenses can make some logical sense, even if it doesn't backtest as nicely as if you invested in another country, if you don't find any compelling reason to favor that country going forward, then tilting towards your own country is as good as, or better, than any.

There's almost always a good argument to be made towards any investing decision that we make.  That's why I'm suspicious of stories.

Incidentally, the best argument for shading home country, in my view, is that it is generally cheaper...
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