Post by: Goldielocks on May 10, 2016, 10:54:06 PM
Anyone else trying it? I am intrigued, but don't know if it was just a flash in the pan topic of the year when those books were written..
I am currently a Couch potato investor (circa 2014 portolios)
Post by: MustacheAndaHalf on May 10, 2016, 11:17:17 PM
I'm skeptical of the book "Double Momentum", but it was educational regarding relative momentum. Double momentum tries to incorporate stocks and bonds - the idea that you hop to bonds when stocks have negative momentum. But to me, the graph looks too neatly fitted to past corrections. I'd rather take the lesser gains of relative momentum that have been studied repeatedly.
I think momentum is an interesting tilt for a mostly indexed portfolio. I don't think most people should try it on their own - a bit like Buffet's advice to use the S&P 500 rather than trying to become a value investor like Buffet.
Post by: sol on May 10, 2016, 11:30:12 PM
(http://forum.mrmoneymustache.com/investor-alley/dual-momentum-investing/)
Some people love it. Those people are misled.
Post by: Goldielocks on May 10, 2016, 11:31:36 PM
Post by: sol on May 10, 2016, 11:48:42 PM
Thanks, Sol, I will check it out.
Fair warning, it's a wild ride. That thread caused much gnashing of teeth on the forum when it was active.
Post by: MustacheAndaHalf on May 10, 2016, 11:58:46 PM
http://www.ftse.com/products/downloads/FTSE_Momentum_Factor_Paper.pdf
Note that the bias comes from FTSE running momentum funds. If you agree with their paper, they get some of your investment dollars. It's better to read academic papers before that investment company white paper.
Post by: forummm on May 11, 2016, 08:06:52 AM
Momentum relies on irrational investing, which I think is here to stay.
Maybe. But investing is getting so automated now that I wonder if it will. Indexing is becoming very common for the small fry (who would be most likely to be irrational investors) and 80% of the trading is done by algorithms now. I'm not sure what the future will look like for momentum strategies.
Post by: FIREby2021 on May 11, 2016, 10:24:19 AM
Not meant to be an endorsement for or against it, just be aware of what needs to be known to effectively use this sort of technique.
Post by: MustacheAndaHalf on May 12, 2016, 03:06:30 AM
My understanding of momentum may differ from others. I'm thinking about 12 months of price data (ignoring the most recent month) predicting the next month. See FTSE white paper for the overview - it mentions several varieties of momentum investing. What I've read describes momentum as something that appears across time periods, asset classes, and in different countries. Some people tilt small cap, some are value investors, and some include momentum as a factor. I index my portfolio, and tilt some of it to momentum.
But I also have much better reasons to avoid momentum than the prior posts, so here goes:
* it's active investing. If someone claims it's algorithmic or whatever, ask them the turnover rate (100%+).
* bad for taxes. Where indexing will delay taxes, momentum cashes in it's taxable gains frequently.
* momentum relies on buying high and selling higher. It picks funds based on past performance.
But that said, most of my money is in index funds with a tilt towards momentum. So to answer OP's query, I use momentum as a tilt in my indexed portfolio.
Post by: PhysicianOnFIRE on May 12, 2016, 11:11:20 AM
That's just one example, but I plan to stay the course with indexing and rebalancing.
Best,
-PoF
Post by: forummm on May 12, 2016, 07:24:24 PM
Miles Dividend MD reported on his experience with dual momentum (http://www.milesdividendmd.com/dual-momentum-a-year-in-review/) for one year. He underperformed the S&P 500 by 8.2%.
That's just one example, but I plan to stay the course with indexing and rebalancing.
Best,
-PoF
Imagine that you retire with $1 million and a $40k budget. And because you were doing some market timing game you lost $82,000 in one year vs doing nothing! That's over 2 years of spending. That alone could be enough to make your portfolio fail. It would raise your WR to 4.35%. It's just extra risk you don't need.
Post by: sol on May 12, 2016, 07:54:13 PM
Imagine that you retire with $1 million and a $40k budget. And because you were doing some market timing game you lost $82,000 in one year vs doing nothing! That's over 2 years of spending. That alone could be enough to make your portfolio fail. It would raise your WR to 4.35%. It's just extra risk you don't need.
Right, but the momentum people would argue the exact opposite is true. They'd say "why would you wait until you had enough money to fund your retirement with the 4% rule, when just using this nifty market timing strategy that nobody else knows about, you could retire with the 5.5% rule! Retire three years earlier just by following this totally easy trading algorithm that anybody can do! Please don't ask why multibillion dollar hedge funds aren't doing this, they don't know the secret! I'm smart and they're stupid!"
Post by: Goldielocks on May 12, 2016, 09:02:07 PM
Let me quote myself: "I think momentum is an interesting tilt for a mostly indexed portfolio."
My understanding of momentum may differ from others. I'm thinking about 12 months of price data (ignoring the most recent month) predicting the next month. See FTSE white paper for the overview - it mentions several varieties of momentum investing. What I've read describes momentum as something that appears across time periods, asset classes, and in different countries. Some people tilt small cap, some are value investors, and some include momentum as a factor. I index my portfolio, and tilt some of it to momentum.
But I also have much better reasons to avoid momentum than the prior posts, so here goes:
* it's active investing. If someone claims it's algorithmic or whatever, ask them the turnover rate (100%+).
* bad for taxes. Where indexing will delay taxes, momentum cashes in it's taxable gains frequently.
* momentum relies on buying high and selling higher. It picks funds based on past performance.
But that said, most of my money is in index funds with a tilt towards momentum. So to answer OP's query, I use momentum as a tilt in my indexed portfolio.
This description is closer to what I was reading. I was just introduced to the concept in the past 6 months.. deciding what is hype and what may have value for me...
Concept (as I recall it)
--- Use 3 to 12 month momentum to pick the top 3 funds on top, switch monthly, but as noted due to sideways movement, could stay in the same funds for quite a few months so not a frequent switching as one may think.
-- using index funds instead of stocks directly.... (for a bit of diversity)...
-- claim that indexes do not usually drop suddenly, (I am unsure about this)
-- Active investing (which I don't have time for, even if only one-two days a month as claimed, you need to stay on top of it)
--- taxes -- if you pay for taxes from your disposable income as you go, this is a great way to generate lower taxes at retirement, when you may want to pull large sums out at one time to fund something special.... or use a Roth or TFSA...
Thanks for the input. keep it coming..
Post by: MustacheAndaHalf on May 13, 2016, 12:47:09 AM
Miles Dividend MD reported on his experience with dual momentum (http://www.milesdividendmd.com/dual-momentum-a-year-in-review/) for one year. He underperformed the S&P 500 by 8.2%.
Agreed, but nobody in this thread (so far) is advocating for dual momentum.
Post by: sol on May 13, 2016, 09:21:15 AM
Agreed, but nobody in this thread (so far) is advocating for dual momentum.
The arguments on both sides are identical, though. If you think momentum trading is a viable strategy, then you also think dual momentum is a viable strategy and vice versa. They're both market timing, with just slightly different rules on how to time your trades.
Post by: forummm on May 13, 2016, 09:32:42 AM
Miles Dividend MD reported on his experience with dual momentum (http://www.milesdividendmd.com/dual-momentum-a-year-in-review/) for one year. He underperformed the S&P 500 by 8.2%.
Agreed, but nobody in this thread (so far) is advocating for dual momentum.
This might sound harsh, but I'm glad that MDMD lost so much in his first year of doing it. I wish him nothing but the best. And I think an early loss like this could be very valuable. Hopefully it was a relatively small amount of money (say 8% of 100k or something). And it occurred during a time when he's still working and can replace that money by working longer. Then he can learn from it relatively cheaply that it's not the panacea he appears to feel that it is. He would say that he knows that DM occasionally underperforms the index. But now he gets to feel what that's like from personal experience and decide if it's worth it to him to continue.
Personally, I am not well suited to handle a lot of the psychology of market timing. It's just so easy to second guess yourself and focus only on when you got the call wrong. It would be a terrible way to live, worrying whether you are making the right move, or not making a move when you feel like it could be time to do that. And it's only your life savings on the line. No thanks.
Post by: Tawcan on May 13, 2016, 02:50:42 PM
Post by: hodedofome on May 13, 2016, 04:21:52 PM
Post by: eudaimonia on May 13, 2016, 04:31:24 PM
Post by: forummm on May 13, 2016, 05:07:00 PM
Gotta love these threads. For those who say momentum is "wrong" I'll leave you with one quote from the economist who built upon and ultimately popularized Efficient Market Theory, Dr. Eugue Fama. Years after EMT, he also co-discovered momentum. Here is what he has to say: Momentum is "the center stage anomaly of recent years…an anomaly that is above suspicion…the premier market anomaly." Fama/French (2008).
Feel free to bet your life savings on it if that's what you want to do. It might work. It might not. For me, the downsides (which are significant) far outweigh the upsides. Even if your return might be higher on average if you could simulate your retirement a hundred times, there are costs to pursuing that strategy. And you don't get to simulate your retirement more than just the once.
Post by: hodedofome on May 13, 2016, 07:38:54 PM
Post by: MustacheAndaHalf on May 14, 2016, 01:21:36 AM
This is the third time you've claimed people are betting everything on momentum. I don't see anyone else saying that, except you. It sounds like you're arguing against a point you created.Gotta love these threads. For those who say momentum is "wrong" I'll leave you with one quote from the economist who built upon and ultimately popularized Efficient Market Theory, Dr. Eugue Fama. Years after EMT, he also co-discovered momentum. Here is what he has to say: Momentum is "the center stage anomaly of recent years…an anomaly that is above suspicion…the premier market anomaly." Fama/French (2008).Feel free to bet your life savings on it if that's what you want to do.
Post by: MustacheAndaHalf on May 14, 2016, 01:48:26 AM
I view momentum along the same lines as REIT or emerging markets. Instead of 10% REIT, maybe tilt 10% momentum with a fund that has low fees. But I'm not an authority on momentum - so advice should come from reading about momentum yourself, seeing multiple studies, and convincing yourself it has value.
A big question: if markets are efficient, why have people gained extra return from momentum? What is the risk story? With the 3 factor model (stock beta, small company, value factor) each factor represented a risk story. Small companies can go under, and value companies have added debt that makes them more likely go under as well. But there isn't a risk story for momentum, so it's a thorn in the side of the efficient markets theory. Meanwhile, behavioral investing has several ideas about why momentum exists and persists.
I think momentum is an artifact created by human emotions in the stock market. People chase winners, but then don't sell or switch in a disciplined way. But it's not the only factor - reversion to the mean has a powerful impact in the markets. That's probably why 12 month momentum works but 1 month momentum does not. So rather than deal with hundreds of stocks myself, I prefer to find a fund that tries to capture the momentum factor and tilt some of my investing to that - with the rest being low cost passive stock index funds.
Post by: forummm on May 14, 2016, 07:05:50 AM
Why does it have to be all or nothing? Why can't strategies be allocated to like assets?
It doesn't. But if you're doing it with 5% of your money, then what's the point? If you're doing it with 50%, then that's still too risky by my book.
Post by: hodedofome on May 14, 2016, 07:22:39 AM
Why does it have to be all or nothing? Why can't strategies be allocated to like assets?
It doesn't. But if you're doing it with 5% of your money, then what's the point? If you're doing it with 50%, then that's still too risky by my book.
Daniel Kahneman in his book talks about how people that don't like something, automatically believe it to be higher risk. And when they like something, they believe it to be lower risk. So a guy who likes cars probably thinks racing cars is low risk, while a guy who doesn't like cars will think it's higher risk.
You should first figure out if your belief that momentum investing is riskier than buy and hold is based on the fact that you just don't like it.
Post by: forummm on May 14, 2016, 08:26:38 AM
Why does it have to be all or nothing? Why can't strategies be allocated to like assets?
It doesn't. But if you're doing it with 5% of your money, then what's the point? If you're doing it with 50%, then that's still too risky by my book.
Daniel Kahneman in his book talks about how people that don't like something, automatically believe it to be higher risk. And when they like something, they believe it to be lower risk. So a guy who likes cars probably thinks racing cars is low risk, while a guy who doesn't like cars will think it's higher risk.
You should first figure out if your belief that momentum investing is riskier than buy and hold is based on the fact that you just don't like it.
No, on the contrary--I wish it were a magic way to ensure that I beat the market and that I could quit my job earlier and get super rich over time. That would be fun. But I don't do it because my analysis has led me to believe it to be riskier (although with greater upside) than B&H and that the potential benefits (which are real) don't outweigh the risks and costs (which are also real). I think the idea of attempting to avoid the huge downturns (with DM at least) is appealing. And similarly the potential for higher overall returns. And that's why I participated in some backtesting data analysis to see what I could learn about it during the DM mega thread. I have a huge set of spreadsheet tabs looking into various DM strategies and how things worked out in real time using 140+ years of historical data. I know DM isn't the only form of M, but it's the one I spent the most time looking into. While DM does beat B&H half the decades during that period, it also loses in the other half. While it's better for the longer protracted and massive downturns followed by very long protracted growth phases (like 2000 and 2008), it's also possible to avoid selling (or selling much) during those downturns by just living off of dividends, bonds, and cutting back on optional spending. Sure, you'd have more money with DM in those rare giant downturn scenarios (which happened only twice in the last 75 years), but I also don't need more money. Something like the 4% rule (or 5% with flexible spending) gives you enough money so that you don't need to have "beat the market" returns. And B&H ensures that you get market returns with low costs. Market timing presents the risk of having bad timing which could seriously harm portfolio survival. My goal is to have enough money so that I don't need to work or worry about meeting my expenses. Therefore I'm not willing to take on more risk of portfolio failure for the possibility of maybe dying with a bunch more money in the bank that I don't need. I don't think it's a good idea to leave a ton of money to your kids, so I'm not motivated to die rich to pass on money. I am a fan of giving to charity, but I can also do that during my life and through acts of service.
Post by: MustacheAndaHalf on May 14, 2016, 03:10:42 PM
..."Dual Momentum" is not the topic of this thread. One author supports dual momentum. And to Sol's earlier point, plain momentum has been studied in more than a dozen academic papers (about a dozen are listed in the FTSE Momentum white paper). Momentum has been found in different countries, not just the U.S. markets. It's been found with stocks, bonds, commodities and other assets. Momentum has been studied in different time periods, including time periods after it was published.
And that's why I participated in some backtesting data analysis to see what I could learn about it during the DM mega thread. I have a huge set of spreadsheet tabs looking into various DM strategies and how things worked out in real time using 140+ years of historical data. I know DM isn't the only form of M, but it's the one I spent the most time looking into.
...
---
Now I'd like to compare how far apart my approach is from 100% low-cost index funds. Most of my money is in index funds with low expense ratios. I hold the standard market components like US index, developed markets index, and emerging markets index. So when I argue for a particular tilt, I'm still holding most of my money in Vanguard index funds. If momentum cost 1% expense ratio, I would avoid it just like I'd avoid an index fund with that level of fees. I view momentum like small/value, REIT or emerging market tilts - a possible way to tilt a mostly indexed portfolio.
Post by: sol on May 14, 2016, 04:36:31 PM
Now I'd like to compare how far apart my approach is from 100% low-cost index funds. Most of my money is in index funds with low expense ratios. I hold the standard market components like US index, developed markets index, and emerging markets index. So when I argue for a particular tilt, I'm still holding most of my money in Vanguard index funds. If momentum cost 1% expense ratio, I would avoid it just like I'd avoid an index fund with that level of fees. I view momentum like small/value, REIT or emerging market tilts - a possible way to tilt a mostly indexed portfolio.
Unless you're doing all of your trading inside of a tax advantaged account, the primary problem with market timing isn't the higher expense ratios of the funds you're in, it's the capital gains and losses you're forced to realize every time you make a trade.
Well, that and the delusion that you can time the market.
Post by: forummm on May 14, 2016, 06:45:06 PM
Now I'd like to compare how far apart my approach is from 100% low-cost index funds. Most of my money is in index funds with low expense ratios. I hold the standard market components like US index, developed markets index, and emerging markets index. So when I argue for a particular tilt, I'm still holding most of my money in Vanguard index funds. If momentum cost 1% expense ratio, I would avoid it just like I'd avoid an index fund with that level of fees. I view momentum like small/value, REIT or emerging market tilts - a possible way to tilt a mostly indexed portfolio.
So you're always in equities the same amount--it's just a different allocation between different indexes depending on whatever "signal" you use that something is hot or cold? So you might be bullish on VEMAX one month or VFIAX another and shift all/some of your money to that one? What advantages do you think this provides you? Do you have backtesting that this at least worked in the past?
Interesting post: One point is that as indexing has gotten more and more popular, active investors are going up against the "best" active managers more and more because more of the suckers are moving to indexing.
http://www.philosophicaleconomics.com/2016/05/passive/
Post by: MustacheAndaHalf on May 14, 2016, 10:02:56 PM
40% total bond market
25% US Total Stock Market
25% Total International Market
10% momentum factor fund
First, the 50% indexed stock portion of the above does not change. Momentum signals are ignored for 90% of the above sample portfolio - the stock/bond allocation is unchanged. It's like a REIT tilt, where an investor puts 10% of their dollars into a REIT fund and then does not change that allocation. But instead, the 10% (in this example) is used to purchase shares in a momentum fund.
I agree with Sol - a real danger in allocating investment dollars to a momentum fund is the fund's turnover. The tax impact could be significant in a taxable account.
Post by: forummm on May 15, 2016, 08:17:05 AM
sol / forummm - Ah, I see where you're coming from now. But I think "tilt" has been misunderstood. Let me provide an example (not mine) to show what I mean:
40% total bond market
25% US Total Stock Market
25% Total International Market
10% momentum factor fund
First, the 50% indexed stock portion of the above does not change. Momentum signals are ignored for 90% of the above sample portfolio - the stock/bond allocation is unchanged. It's like a REIT tilt, where an investor puts 10% of their dollars into a REIT fund and then does not change that allocation. But instead, the 10% (in this example) is used to purchase shares in a momentum fund.
I agree with Sol - a real danger in allocating investment dollars to a momentum fund is the fund's turnover. The tax impact could be significant in a taxable account.
So 10% is in momentum and the rest doesn't move. OK, that at least limits your downside risk. But if you're only doing 10%, what do you think that benefits you? Do you expect that it will increase your performance in a way that lets you retire earlier? What happens if it lags the market?
And if this is a managed fund, do you think the benefits are going to outweigh the fees, trading costs (not included in the fees btw), taxes, etc? It's exceedingly difficult for any active fund to outperform the passive index when all costs are included.
Post by: Nad on May 17, 2016, 07:14:15 PM
I think momentum is a market inefficiency that can be exploited for quite some more time (if not forever). Only time will tell, but until it's rendered useless, I'll happily be raking in the profits :)
Post by: sol on May 17, 2016, 10:00:25 PM
I think momentum is a market inefficiency that can be exploited for quite some more time (if not forever). Only time will tell, but until it's rendered useless, I'll happily be raking in the profits :)
Are you willing to share your trades with us? There's nothing more convincing to people than watching a strategy unfold in real time, but unfortunately momentum strategies have performed very poorly over the lifetime of this forum so everyone who has posted their real-time momentum trades has significantly underperformed the market.
If you're not willing to share with us (and most people aren't) then forgive us for being skeptical when you tell us how great it's working out for you. These things are always easy to see in retrospect, but hard to predict as they happen.
Post by: Nad on May 22, 2016, 02:57:23 PM
My momentum portfolio is updated once a month. I hold 5 individual stocks at a time. The fewer the stocks the more volatility, but the long-term returns are higher too. I don't mind lower returns with lower volatility, so I plan on increasing the number of holdings as my portfolio value grows.
I'm in Canada and decided to hold Canadian stocks. But from my backtests, I concluded the strategy works well in other markets too (USA, Australia).
April 2016:
FR.TO
K.TO
RON.TO
ABX.TO
BTO.TO
May 2016
FR.TO
K.TO
YRI.TO
TCK-B.TO
BTO.TO
I'll post the June holdings on June 1st.
Post by: k9 on May 23, 2016, 04:09:51 AM
Momentum investors sell their stocks when they start losing a lot. Sure, this way you lock in a portion of your losses, but it is much easier emotionally to wait they recover.
Post by: RichMoose on May 23, 2016, 11:29:41 AM
Sure, I could definitely share my trades on the same day I make them. This way, you see my strategy in real time.
My momentum portfolio is updated once a month. I hold 5 individual stocks at a time. The fewer the stocks the more volatility, but the long-term returns are higher too. I don't mind lower returns with lower volatility, so I plan on increasing the number of holdings as my portfolio value grows.
I'm in Canada and decided to hold Canadian stocks. But from my backtests, I concluded the strategy works well in other markets too (USA, Australia).
April 2016:
FR.TO
K.TO
RON.TO
ABX.TO
BTO.TO
May 2016
FR.TO
K.TO
YRI.TO
TCK-B.TO
BTO.TO
I'll post the June holdings on June 1st.
Do you mind sharing what stocks you have in consideration when doing your monthly calculations?
Post by: MustacheAndaHalf on May 23, 2016, 11:53:19 AM
As I understand it, momentum doesn't sell when stocks head lower: momentum sells when other stocks have done better. So if you hold something that has been up 5%, but spot something up 8%, you switch. You use increases in price to direct your investing decision.
Nad -
If 100% of your portfolio is 5 stocks picked based on momentum, and potentially changing 12 times a year, that seems like a very risky situation. If you're trying an experiment with 1% of your assets, that's different.
sol -
I'm using the price from Google Finance for S&P 500, and the actual trade for the momentum buy/sell. But like you, without years of data I don't buy any particular strategy. I opted to create a separate thread:
http://forum.mrmoneymustache.com/investor-alley/playing-with-momentum/
Post by: Nad on July 04, 2016, 11:13:38 AM
Do you mind sharing what stocks you have in consideration when doing your monthly calculations?
I'm considering the top ~225 stocks (according to market cap) in the Canadian market. Pretty much all the holdings you'd find in a Canadian market ETF. From testing, it works as well using stocks from other markets (ex. the ~500 stocks making up the S&P 500).
Nad -
If 100% of your portfolio is 5 stocks picked based on momentum, and potentially changing 12 times a year, that seems like a very risky situation. If you're trying an experiment with 1% of your assets, that's different.
I'm experimenting with my TFSA account, which is definitely not 100% of my assets... more like 10%.
Forgot to update for june since I was going on vacation the same day. But here we go:
June 2016:
FR.TO
K.TO
IMG.TO
VII.TO
PAA.TO
And for this month...
July 2016:
FR.TO
SSO.TO
TCW.TO
TCK-B.TO
PVG.TO
Post by: Kaspian on July 05, 2016, 08:46:08 AM
I am currently a Couch potato investor (circa 2014 portolios)
Hahaha... We "couch potatoes," are supposed to be just that--lazy bastard reclined on his couch doing nothing and letting automation and time do all the work. ....Maybe getting up very occasionally to go to the bathroom, get some chips, and rebalance. What are you doing looking at your portfolio and rethinking it all? That goes against the rules--especially after (less than?) two years! Return to your couch immediately, be a slob, and forget about all the nonsense.
Post by: RichMoose on July 05, 2016, 08:54:24 PM
Post by: Goldielocks on July 05, 2016, 11:09:52 PM
I am currently a Couch potato investor (circa 2014 portolios)
Hahaha... We "couch potatoes," are supposed to be just that--lazy bastard reclined on his couch doing nothing and letting automation and time do all the work. ....Maybe getting up very occasionally to go to the bathroom, get some chips, and rebalance. What are you doing looking at your portfolio and rethinking it all? That goes against the rules--especially after (less than?) two years! Return to your couch immediately, be a slob, and forget about all the nonsense.
Ha, yes. I rebalance about every 6 months...
Having the TFSA as a separate account though, with a different goal horizon has me thinking, though. Especially as DH is NOT a couch potato type and really into picking individual stocks; when I read about momentum, I thought maybe we could get together on a strategy for TFSA that I would like better than his method, and he would like better than mine...
Tuxedo's comment about trading costs is very valid. With $50k in an account, using the momentum strategy I was looking at, would involve an average of 6-12 trades a year... at $20 each ($10 in and the same out.) e.g. 3 accounts, that hold for several month runs at a time...
$120-$240 / $50k. 0.24% to 0.5% in trading fees.... per year... still worthy of pause.
Post by: Nad on July 06, 2016, 02:42:20 PM
So if you have 5 positions and approximately $50k in your TFSA, are you sure that the outperformance will justify the cost of your trading? Also, did the studies in your research include trading costs? It looks like average month results in 4 positions changing. At $10 per trade, each month costs $80. Annually that's about 2% of assets which is steep.
From the backtests I did, the ~2% trading cost is totally worth it considering the significant outperformance. As for the future, well, I'm willing to take the risk :)
Post by: Interest Compound on July 06, 2016, 08:00:29 PM
So if you have 5 positions and approximately $50k in your TFSA, are you sure that the outperformance will justify the cost of your trading? Also, did the studies in your research include trading costs? It looks like average month results in 4 positions changing. At $10 per trade, each month costs $80. Annually that's about 2% of assets which is steep.
From the backtests I did, the ~2% trading cost is totally worth it considering the significant outperformance. As for the future, well, I'm willing to take the risk :)
I hope your analysis was more than "Well it outperformed by +5%, so a -2% trading cost would've been worth it!"
For example, the strategy might be breakeven after the first 10 years in your backtesting, when in reality it would've lost about 20% due to trading costs. If the backtest shows a +20% gain the next year, the real-life portfolio wouldn't even be break-even yet (down 4%)!
If you aren't taking the trading costs into account each year before calculating the next year, you're in for a surprise.
Post by: Nad on July 31, 2016, 02:00:41 PM
This is what I'll be holding tonorrow:
FR.TO
IMG.TO
BTO.TO
TCK-B.TO
YRI.TO
Post by: forummm on July 31, 2016, 02:13:39 PM
So if you have 5 positions and approximately $50k in your TFSA, are you sure that the outperformance will justify the cost of your trading? Also, did the studies in your research include trading costs? It looks like average month results in 4 positions changing. At $10 per trade, each month costs $80. Annually that's about 2% of assets which is steep.
From the backtests I did, the ~2% trading cost is totally worth it considering the significant outperformance. As for the future, well, I'm willing to take the risk :)
2% is hugely expensive. I've studied momentum techniques, and even if you believe that past performance indicates future returns (which you shouldn't wrt momentum for various reasons), the outperformance in back tests is usually less than 2%.
Post by: MustacheAndaHalf on July 31, 2016, 02:43:59 PM
August update!Why are you trying to hijack someone else's thread?
...
Post by: arebelspy on August 01, 2016, 01:39:03 AM
August update!Why are you trying to hijack someone else's thread?
...
Thread's almost three months old, and never got much momentum. Those who would have responded pretty much had a chance, so someone posting their own momentum trading is about as on topic as you'll get, IMO.
Post by: Goldielocks on August 01, 2016, 01:53:10 AM
Post by: Nad on August 01, 2016, 10:14:45 PM
2% is hugely expensive. I've studied momentum techniques, and even if you believe that past performance indicates future returns (which you shouldn't wrt momentum for various reasons), the outperformance in back tests is usually less than 2%.
I would certainly not bother if the historical outperformance was only 2% or even 5%, I wouldn't risk it, especially not the way I do now with only 5 stocks. Maybe with ETFs...
My backtests show significantly more outperformance than that. I'm not sure what formula/strategy/algorithm you played with and what stocks/etfs you applied it to. For the record, my algorithm is not just based on momentum. True, it's the most important component, but I have a couple of other indicators thrown in such as volume and moving average which smooth things out.
I understand momentum may not work forever as most inefficiencies are logically erased over the long term. But I believe momentum is rooted in human psychology, which will take a huge paradigm shift to change, or a very very long time. That, or if all trading becomes automatic, done by computers / robots or whatever.
Thread's almost three months old, and never got much momentum.
I see what you did there
Post by: kenaces on August 02, 2016, 12:11:21 AM
@Nad I think I heard that optimal turnover on momentum strat is ~1 month and diminishes as duration increase. I think it was in podcast with Wes Grey
Post by: forummm on August 05, 2016, 12:02:56 PM
2% is hugely expensive. I've studied momentum techniques, and even if you believe that past performance indicates future returns (which you shouldn't wrt momentum for various reasons), the outperformance in back tests is usually less than 2%.
I would certainly not bother if the historical outperformance was only 2% or even 5%, I wouldn't risk it, especially not the way I do now with only 5 stocks. Maybe with ETFs...
My backtests show significantly more outperformance than that. I'm not sure what formula/strategy/algorithm you played with and what stocks/etfs you applied it to. For the record, my algorithm is not just based on momentum. True, it's the most important component, but I have a couple of other indicators thrown in such as volume and moving average which smooth things out.
You believe you have a system that gets you more than 5% outperformance vs the index?!?!?! That's a bold claim. Care to share any of those backtests?
Post by: kenaces on August 05, 2016, 02:13:51 PM
Post by: Nad on August 05, 2016, 03:05:44 PM
Here are the monthly returns, in blue is my system, in red is a Canadian market ETF. My system has an average monthly return of a little under 3%, the index is at under 1%.
(http://uploads.tapatalk-cdn.com/20160805/67bb11e45e9b89ef5a3baa141ff21697.jpg)
Here's what it looks like cumulatively, again, not including fees and taxes. Starting with $100,000. Log scale.
(http://uploads.tapatalk-cdn.com/20160805/6e05f314d1553e4cb769a5373951c5fe.jpg)
Average yearly return is approximately 35% over that period, while the index is at approximately 10%. That's an average over-performance of 25% before fees and taxes.
[flamesuit on]
Post by: kenaces on August 05, 2016, 03:28:42 PM
Post by: forummm on August 05, 2016, 07:08:45 PM
One 13 year back test isn't much evidence but I hope you started using this in 03 :)
And in a world where there are no taxes and transaction costs.
Post by: Nad on August 06, 2016, 01:40:22 PM
As for the fees, it's true that it can eat a big chunk of the returns, especially with a small investment. But if you're doing this on $100k it starts to be minimal. And even on smaller investment, the over-performance is significant enough to still warrant the fees.
Taxes are the biggest issue with this system IMO. But again, this greatly depends on what kind of account you're using. A tax advantaged account will eliminate most of the issues.
Post by: torbisen on August 06, 2016, 02:09:27 PM
I trade within a taxaccount so the taxes are postponed to when you take money out. I looked into the two porblems of fees for trading and different stock price the day after the adviced stock portifolio is given. I studied two years of trading, and in average you can expect to subtract 4,5% of the 23% (or the annual performance of that year) There was less than 5% chance for missing out on 9% of the profit yearly, and the same 5% chance of missing out on approx 1% of the profit. This is because of the variation of the severity the stocks were more expensive than rated in the mail from the magazine the day after the advise came out. The advice comes out an evening based on the price that day, and you buy it the next day.
I also read a book of Stig Mikalsen called Stocks and Stocktrading (in norwegian) Where he has an chapter telling that following such an portifolio is the easiest way to beat the index. Actually all the portifolios he mentioned beat the Norwegian index Oslo Børs for 85-90% of the years counting. Even better, they also beat the index in bad years.
I tried to follow for 6months this spring and was up around 12-13% while the index did around 7%.
I am definately gonna do this for parts of my portifolio. I believe that with small sums you are able to move effectively in the market, rather than if you have a big fund, you cannot just sell all your holdings in one stock at once, because it will drive the price downwards.
As i say, this has been going on monthly for 28years in this magazine, and i have been reading and following for 15, but it is only lately that the postponed tax accounts together with the falling prices for buying and selling and my amount of savings is doing this practically possible for me without to big losses to tax and to payment for trading.
By the way these guys that gives the advices also sell funds, which does much worse, basicly i think because they are big, moves slow in the marked and has a lot of rules regarding how much to invest in certain sectors and so taking away the freedom of investment.
Would be good to hear what your opinion on such investment strategy would be.
Post by: torbisen on August 06, 2016, 02:10:38 PM
Post by: MustacheAndaHalf on August 06, 2016, 10:29:00 PM
Taxes are not the deciding factor between a 13-year return of 5000% v.s. 350%, per other poster's numbers.One 13 year back test isn't much evidence but I hope you started using this in 03 :)And in a world where there are no taxes and transaction costs.