Author Topic: Dual Momentum Investing  (Read 278204 times)

PizzaSteve

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Re: Dual Momentum Investing
« Reply #1050 on: March 30, 2017, 12:19:08 PM »
Gotta have a story to get people to give you their money to invest.  Proceed with caution when entering the spiders web.

AdrianC

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Re: Dual Momentum Investing
« Reply #1051 on: March 30, 2017, 03:44:44 PM »
Antonacci isn't asking anyone to invest money with him. As far as I can tell he shares his research just because he's that kind of a guy.

Meb Faber has a fund company (Cambria). Nothing interesting there for Boglehead/mustachian types.

RichMoose

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Re: Dual Momentum Investing
« Reply #1052 on: March 30, 2017, 05:38:27 PM »
Thanks for sharing AdrianC. I listened to the podcast and it gave some nice background on Antonacci. He's clearly not to interested in the money. Given his background he could have started a fund and made himself even wealthier than he already is with the research/strategy he did here. Many fund managers have become multi-millionaires and billionaires with weaker strategies than his.

His actions and words show a very indifferent approach to whether or not people actually use the strategy. He's not making a hard sell at all, just sharing facts, giving credit to many others, and sharing his personal opinions on the strategy.

He does license some spins on the general strategy to others, but he suggests​ they do not have a substantial advantage over the basic DM/GEM. GEM is very easy to follow on your own and he honestly believes it's a decent strategy for the long term that will underperform every now and then. He believes this will actually help the strategy over the long term as periods of poor relative performance will cause abandonment of the strategy.

On a matter of more interest to some Mustachians here who oppose all active type investing... Antonacci is actually an early retiree and somewhat Mustachian himself. After working just a decade in finance he pulled the pin, went traveling, took up art, and clearly has a lot of hobbies and interests that many on here can align with.

I genuinely got the impression that he cares about others, the world around him, his personal health and well-being, and helping others by sharing his knowledge in finance and making a tiny bit of coin with it. Who are we as Mustachians to fault him for that?

I should note that I am using a DM type strategy myself, with some minor changes and adaptions for Canadian markets.

Cornel_Westside

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Re: Dual Momentum Investing
« Reply #1053 on: March 30, 2017, 06:40:02 PM »
I find this academically interesting, if not interesting enough to try with a small amount of money for a year to see how I feel about it. But I see people discussing things here and online with different lookback periods. I see people with 5 month look backs, 6 months, and 1 year. I see people comparing equities to the price of short term treasury bonds, to bond funds, to intermediate term bonds.

Has there been analysis on what look back periods and fixed-income investments lead to the best performance in different types of markets? Does a 6 month look back respond better to most bear markets than a year, or does the increased volatility cost you more than the reactivity? Does an intermediate bond fund comparison save you earlier from drops than a shorter term bond?

I don't see a consensus about this, and I think the lookback period is the key to all of this. The whole point (as far as I can see) of dual momentum is that the look back period should follow the trends of investor mood appropriately to get out of bears early enough and back in before gains are lost without costing yourself too much in volatility from trades. It should be easy to have backtested data on this. Does anyone know the answer? What look back period captures investor mood best?

Monkey Uncle

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Re: Dual Momentum Investing
« Reply #1054 on: March 30, 2017, 06:47:08 PM »
I find this academically interesting, if not interesting enough to try with a small amount of money for a year to see how I feel about it. But I see people discussing things here and online with different lookback periods. I see people with 5 month look backs, 6 months, and 1 year. I see people comparing equities to the price of short term treasury bonds, to bond funds, to intermediate term bonds.

Has there been analysis on what look back periods and fixed-income investments lead to the best performance in different types of markets? Does a 6 month look back respond better to most bear markets than a year, or does the increased volatility cost you more than the reactivity? Does an intermediate bond fund comparison save you earlier from drops than a shorter term bond?

I don't see a consensus about this, and I think the lookback period is the key to all of this. The whole point (as far as I can see) of dual momentum is that the look back period should follow the trends of investor mood appropriately to get out of bears early enough and back in before gains are lost without costing yourself too much in volatility from trades. It should be easy to have backtested data on this. Does anyone know the answer? What look back period captures investor mood best?

You could mine historical data to come up with answers to all of those questions.  But then your model likely would be over-fitted to precise historical conditions that aren't likely to occur in exactly the same configuration again.

lost_in_the_endless_aisle

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Re: Dual Momentum Investing
« Reply #1055 on: March 30, 2017, 07:29:04 PM »
An economist and his non-economist friend are walking down the street. The friend sees what appears to be a $20 bill on the ground and stops to bend over and pick it up. The economist stops his friend by saying "if that really was a $20 bill, someone else would have picked it up already."

brooklynguy

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Re: Dual Momentum Investing
« Reply #1056 on: March 30, 2017, 07:50:57 PM »
An economist and his non-economist friend are walking down the street. The friend sees what appears to be a $20 bill on the ground and stops to bend over and pick it up. The economist stops his friend by saying "if that really was a $20 bill, someone else would have picked it up already."

I was about to say that that joke was already told in this very thread, but then I realized it couldn't really have been or else it wouldn't have just been repeated!

lost_in_the_endless_aisle

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Re: Dual Momentum Investing
« Reply #1057 on: March 30, 2017, 07:59:00 PM »
An economist and his non-economist friend are walking down the street. The friend sees what appears to be a $20 bill on the ground and stops to bend over and pick it up. The economist stops his friend by saying "if that really was a $20 bill, someone else would have picked it up already."

I was about to say that that joke was already told in this very thread, but then I realized it couldn't really have been or else it wouldn't have just been repeated!
Yes, I suppose that one falls under "if it was a good joke, someone else would have already told it"

RichMoose

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Re: Dual Momentum Investing
« Reply #1058 on: March 30, 2017, 09:30:52 PM »
I find this academically interesting, if not interesting enough to try with a small amount of money for a year to see how I feel about it. But I see people discussing things here and online with different lookback periods. I see people with 5 month look backs, 6 months, and 1 year. I see people comparing equities to the price of short term treasury bonds, to bond funds, to intermediate term bonds.

Antonacci recommends a 12 month lookback as adequate. He suggests there are ways to get somewhat higher returns by changing the timing, but feels the simplicity of 12 months is beneficial in itself. He also said that playing with timing doesn't give substantial extra returns and can increase Portfolio turnover and taxes.

In the research papers he compares to cash (T bills), being the ultimate safe return. However in GEM he uses an aggregate bond index. The biggest factor here is Fed actions. As long as the Fed practice is to reduce interest rates in downturns, agg bonds will be better because they get a bigger interest rate effect on underlying bond values.

Trying it for a year is just silly. You are likely to be in just one or two asset classes since portfolio turnover occurs about 1.3x annually. To properly evaluate this strategy you have to commit to investing this way over a complete business cycle (peak to peak), or around 10 years.

Antonacci himself tells followers to consider abandoning the strategy if it underperforms for a whole business cycle. How many greedy fund managers or active investing promotors say that?

CriticalMass

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Re: Dual Momentum Investing
« Reply #1059 on: March 31, 2017, 08:22:07 AM »
I find this academically interesting, if not interesting enough to try with a small amount of money for a year to see how I feel about it. But I see people discussing things here and online with different lookback periods. I see people with 5 month look backs, 6 months, and 1 year. I see people comparing equities to the price of short term treasury bonds, to bond funds, to intermediate term bonds.

Antonacci recommends a 12 month lookback as adequate. He suggests there are ways to get somewhat higher returns by changing the timing, but feels the simplicity of 12 months is beneficial in itself. He also said that playing with timing doesn't give substantial extra returns and can increase Portfolio turnover and taxes.

In the research papers he compares to cash (T bills), being the ultimate safe return. However in GEM he uses an aggregate bond index. The biggest factor here is Fed actions. As long as the Fed practice is to reduce interest rates in downturns, agg bonds will be better because they get a bigger interest rate effect on underlying bond values.

Trying it for a year is just silly. You are likely to be in just one or two asset classes since portfolio turnover occurs about 1.3x annually. To properly evaluate this strategy you have to commit to investing this way over a complete business cycle (peak to peak), or around 10 years.

Antonacci himself tells followers to consider abandoning the strategy if it underperforms for a whole business cycle. How many greedy fund managers or active investing promotors say that?

He uses the Treasury Bills for comparison only.  If the return of the SP500 or International-Ex-US is lower than the Treasury Bill then he buys aggregate bonds (Barclays aggregate).

Cornel_Westside

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Re: Dual Momentum Investing
« Reply #1060 on: March 31, 2017, 01:28:54 PM »
Antonacci recommends a 12 month lookback as adequate. He suggests there are ways to get somewhat higher returns by changing the timing, but feels the simplicity of 12 months is beneficial in itself. He also said that playing with timing doesn't give substantial extra returns and can increase Portfolio turnover and taxes.

In the research papers he compares to cash (T bills), being the ultimate safe return. However in GEM he uses an aggregate bond index. The biggest factor here is Fed actions. As long as the Fed practice is to reduce interest rates in downturns, agg bonds will be better because they get a bigger interest rate effect on underlying bond values.

Trying it for a year is just silly. You are likely to be in just one or two asset classes since portfolio turnover occurs about 1.3x annually. To properly evaluate this strategy you have to commit to investing this way over a complete business cycle (peak to peak), or around 10 years.

Antonacci himself tells followers to consider abandoning the strategy if it underperforms for a whole business cycle. How many greedy fund managers or active investing promotors say that?
I don't mean "trying it for a year" to try to see if it outperforms. I understand the most value from this is in the decades so that you aren't crushed by a downturn. I mean trying it in the sense of simply following the plan every month and getting used to how it works.

So he suggests 12 months. Reading his website, I see his reasons for it. Whipsaw is minimized and it is still reactive enough to bear markets. It surprises me that 12 months has performed better than 9 or 6, but I am a recent investor and recent bear markets have been on the shorter side. If I think that a trend of shorter bears will continue, I may consider 9 months. But I may lose more in whipsaw than I expect.

One thing that is interesting is this quote by him:

Quote
  On page 101 and 112 of my book I give a simplified logic for GEM so anyone can easily implement it using a free charting website. There is a minor difference if you calculate the signals as discussed on page 98 of my book. I mention there that I determine absolute momentum using only the S&P 500 index, since the U.S. leads world equity markets. I cite a supporting reference. This means we may occasionally be in aggregate bonds if the trend in U.S. stocks is down even when non- U.S. stocks are the strongest asset. 

So he apparently uses only the US market as an absolute momentum signal. Very interesting.

I see that he uses the S&P 500 Index and the All World Ex US Index. But he also uses 1-3mo T-Bills as a comparison but then buys Barclays Aggregate Bonds. Does that mean we can choose our own US or International Index Fund as well but use his indices? Because it does make sense to use the most visible indices for momentum as a comparator but then buy the most diversified fund. So in this case I'd use the S&P 500 index to know if I should buy Vanguard Total Market Index. I could do the same for the bond fund in which instead of the Barclays Aggregate I could use a Vanguard aggregate.

I'm going to set up a Perf Chart and go with it with ~10% of my Roth IRA to make sure I understand it. Then I'll consider switching higher percentages of my retirement accounts to this strategy. The key concern is my lookback period matching investor mood such that bear markets are captured correctly by it in the future.
« Last Edit: March 31, 2017, 02:41:48 PM by Cornel_Westside »

AdrianC

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Re: Dual Momentum Investing
« Reply #1061 on: April 05, 2017, 10:33:50 AM »
Has there been analysis on what look back periods and fixed-income investments lead to the best performance in different types of markets? Does a 6 month look back respond better to most bear markets than a year, or does the increased volatility cost you more than the reactivity? Does an intermediate bond fund comparison save you earlier from drops than a shorter term bond?

I don't see a consensus about this, and I think the lookback period is the key to all of this. The whole point (as far as I can see) of dual momentum is that the look back period should follow the trends of investor mood appropriately to get out of bears early enough and back in before gains are lost without costing yourself too much in volatility from trades. It should be easy to have backtested data on this. Does anyone know the answer? What look back period captures investor mood best?

You can back test different look-back periods yourself here:

https://www.portfoliovisualizer.com/test-market-timing-model?timingModel=6

I see a 10 to 15 month look back as being advantageous, back to 1988. 12 month gives peak returns to 1988. 10 month gives peak returns to 1998.

Going forward...who knows?



RichMoose

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Re: Dual Momentum Investing
« Reply #1062 on: April 05, 2017, 05:28:36 PM »
Has there been analysis on what look back periods and fixed-income investments lead to the best performance in different types of markets? Does a 6 month look back respond better to most bear markets than a year, or does the increased volatility cost you more than the reactivity? Does an intermediate bond fund comparison save you earlier from drops than a shorter term bond?

I don't see a consensus about this, and I think the lookback period is the key to all of this. The whole point (as far as I can see) of dual momentum is that the look back period should follow the trends of investor mood appropriately to get out of bears early enough and back in before gains are lost without costing yourself too much in volatility from trades. It should be easy to have backtested data on this. Does anyone know the answer? What look back period captures investor mood best?

You can back test different look-back periods yourself here:

https://www.portfoliovisualizer.com/test-market-timing-model?timingModel=6

I see a 10 to 15 month look back as being advantageous, back to 1988. 12 month gives peak returns to 1988. 10 month gives peak returns to 1998.

Going forward...who knows?

Another important consideration is turnover and taxation. With shorter lookback periods your turnover is higher and it's much more likely to be in the form of Capital Gains not eligible for the long-term holding status. This isn't necessarily a factor in Canada (where I live), but it might be a large enough factor in the US where at high income, shorter term capital gains are taxed pretty steep.

Also, with shorter lookback you're more likely to be whipsawed, which can cost you money.

AdrianC

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Re: Dual Momentum Investing
« Reply #1063 on: April 06, 2017, 01:15:54 PM »
Another important consideration is turnover and taxation. With shorter lookback periods your turnover is higher and it's much more likely to be in the form of Capital Gains not eligible for the long-term holding status. This isn't necessarily a factor in Canada (where I live), but it might be a large enough factor in the US where at high income, shorter term capital gains are taxed pretty steep.

Also, with shorter lookback you're more likely to be whipsawed, which can cost you money.

If I was to do this it would be in a tax-deferred account, no question. So taxes are not an issue, and trading costs are not really an issue (free trades at Vanguard and Fidelity).

The issue, apart from any ethical considerations, is the whipsaw. Theres a distinct possibility that we switch out of stocks after they go down, and have to buy them back after they've gone up. Sell low/buy high is not a strategy I find appealing.

Aspects I do find appealing:
Possibility of avoiding large draw-downs.
Uses three funds we all know and love already, and just messes with the asset allocation if we do it with a small part of the portfolio.
Rules-based system
Possibility of a larger equity allocation in FIRE

Im still thinking about it. I did buy the currently indicated asset (US stocks) in early January, with about 15% of our portfolio that Id had in short-term bonds. I labeled this purchase as GEM??.

So far, so good. But will I be able to make the switch to International or Bonds if indicated? Dont know yet.

RichMoose

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Re: Dual Momentum Investing
« Reply #1064 on: April 06, 2017, 06:34:48 PM »
Another important consideration is turnover and taxation. With shorter lookback periods your turnover is higher and it's much more likely to be in the form of Capital Gains not eligible for the long-term holding status. This isn't necessarily a factor in Canada (where I live), but it might be a large enough factor in the US where at high income, shorter term capital gains are taxed pretty steep.

Also, with shorter lookback you're more likely to be whipsawed, which can cost you money.

If I was to do this it would be in a tax-deferred account, no question. So taxes are not an issue, and trading costs are not really an issue (free trades at Vanguard and Fidelity).

The issue, apart from any ethical considerations, is the whipsaw. Theres a distinct possibility that we switch out of stocks after they go down, and have to buy them back after they've gone up. Sell low/buy high is not a strategy I find appealing.

Aspects I do find appealing:
Possibility of avoiding large draw-downs.
Uses three funds we all know and love already, and just messes with the asset allocation if we do it with a small part of the portfolio.
Rules-based system
Possibility of a larger equity allocation in FIRE

Im still thinking about it. I did buy the currently indicated asset (US stocks) in early January, with about 15% of our portfolio that Id had in short-term bonds. I labeled this purchase as GEM??.

So far, so good. But will I be able to make the switch to International or Bonds if indicated? Dont know yet.

Based on my own calculations, albeit modified for Canadian use and not a perfect Antonacci-type GEM, in the past 2 market cycles there has been a clear pattern of lower returns during the bull market portion. You should expect to get only about 90% of the index return due to whipsaw "costs". This means that your strategy might direct you to sell 1000 units of fund XYZ and four months later you buy back 950 units of XYZ. Sucky...

The problem with GEM is that it is impossible to perfectly predict bear markets, so that means you will accept a somewhat lower returns in bull markets in order to avoid the largest part of losses in longer bear markets. I don't believe you can sustainably have the best of both worlds, although it has happened in previous cycles.

However the evidence is real that, over every complete market cycle, DM has outperformed the standard balanced index portfolio somewhat and very importantly (to me) reduced big drawdowns. If this continues, you could virtually eliminate sequence risk in retirement.

Also, statistically you probably would increase your equity allocation. GEM actually has you in bonds 30-35% of the time while many here put less than that allocation of bonds in their portfolio (not sure about your target AA of course).

I believe quite firmly that DM is a strategy you have to commit to for a full market cycle to see the benefits. Comparing performance to a Boglehead 3-fund or something similar from month to month, or even year to year, is deceiving because DM will either look really good or bad.

I would suggest you be cautious taking the leap. Do your research and make sure you feel comfortable and prepared to make the market cycle commitment before jumping. That's potentially 10 years! I would agree that DM is better done in protected accounts, but again this only exacerbates the commitment requirement as then you would easily be comparing returns from one account to the next.

brooklynguy

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Re: Dual Momentum Investing
« Reply #1065 on: April 07, 2017, 11:02:55 AM »
It's not directly related to dual momentum, but there's an interesting article in today's Wall Street Journal describing a theory that the current widespread use of volatility insurance by market participants is creating a self-reinforcing feedback loop having the effect of depressing market volatility, precisely the inverse of the volatility-amplification effect that was attributed to momentum trading upthread.

https://www.wsj.com/articles/are-traders-creating-a-bizarre-new-feedback-loop-feedback-loop-feedback-loop-1491557400

kenaces

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Re: Dual Momentum Investing
« Reply #1066 on: April 19, 2017, 07:27:43 PM »
Interesting thread :)

I read Meb Faber's white paper on his trinity portfolio(includes big allocation to trend following) and that lead me thinking about trend/momentum again.  So I am just about finished with the Dual Momentum Investing book and have listened to all the podcast and youtube videos I could find with Gary.  I find the idea of diversifying my portfolio with a component of trend/momentum to be very compelling but I can't buy into paying Faber 80bps(+trading costs) for his GMOM ETF. 

I am going to continue reading up on this on dualmomentum.net and alphaarchitects.com.  Any other places with good content on building portfolio that had trend component to it?

RichMoose

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Re: Dual Momentum Investing
« Reply #1067 on: April 19, 2017, 09:17:33 PM »
If you haven't already, read all the posts in Antonacci's blog, www.dualmomentum.net and info site www.optimalmomentum.com

The Optimal site has the white papers that he based the book on. It also keeps a running picture on the GEM strategy until last month.

You could also read the white papers from other researchers that Antonacci referred to in his own research.

www.sharpereturns.com also has some decent technical posts on GEM/DM

kober.paul

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Re: Dual Momentum Investing
« Reply #1068 on: February 08, 2018, 11:05:40 AM »
Sorry if this has been addressed. I have skimmed through much of this thread and it is hard to pull out information.

So I have a simple question to those using DMI.

With how much of your net worth are you actually doing DMI?

I have heard it is best with tax advantaged accounts.  Also, some of us have a large amount of net worth in real-estate (prime residence & rentals).

To answer my own question.

Out of my investable assets (cash, stocks, bonds etc.)  I would consider DMI with about 50%.  Out of my total net worth it would be less than 20%.


Some of you may have a number figure like, I will try DMI with $10K $100K etc.

I am just trying to get a feel for what people are actually doing.

Thanks in advance for sharing.


100% of my investable assets (both taxable and tax-free) are using DMI (specifically GEM). That is about 50% of my net worth.  I cleaned up all my accounts and streamlined to follow GEM starting October 2017. I am using VEU, FSGDX and VTIAX to index global equities ex USA (depending on taxable or tax deferred account - I have it in a couple of places). Currently GEM points to global equities. I would use similar combination of ETF and funds if I need to be in the US. I would use AGG or something similar when GEM signals me to get out of stocks.

Hello to everybody on this forum! This is my first post here. I thought I respond to this old post as a way to introduce myself. I have read most of of the 22 pages of the discussions related to DM skimming through some of the off topics. Looks like this forum became very quiet after miles left. I enjoyed the discussions related to DM. Hoping to see more of it and participate in some.
« Last Edit: February 08, 2018, 05:08:16 PM by kober.paul »

Tardi44

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Re: Dual Momentum Investing
« Reply #1069 on: February 08, 2018, 01:46:50 PM »
Hi,
For for keeping this topic alive.

For GEM lovers here is an exellent blog I just discover with GEM monthly results using VEU, IVV and BND.
https://indexswingtrader.blogspot.fr/2016/10/prospecting-dual-momentum-with-gem.html
What do you think about ?

kober.paul

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Re: Dual Momentum Investing
« Reply #1070 on: February 08, 2018, 04:53:52 PM »
Hi,
For for keeping this topic alive.

For GEM lovers here is an exellent blog I just discover with GEM monthly results using VEU, IVV and BND.
https://indexswingtrader.blogspot.fr/2016/10/prospecting-dual-momentum-with-gem.html
What do you think about ?

Yeah - I keep an excel sheet myself. At the end of the month, it takes a good minute or two to plug in the previous month's return numbers and the excel sheets spits out the signal for the next month. For those who don't want to keep such excel sheet, this site seem to provide a signal calculator. There seems to be some other sites as well that do this - http://www.scottsinvestments.com/dual-etf-momentum/. Quite frankly, I feel much better if I do it myself. It is easy enough.

kober.paul

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Re: Dual Momentum Investing
« Reply #1071 on: February 12, 2018, 04:07:17 PM »
Thanks for the interesting post.  An interesting side topic might be "the power of an individual to shape thinking, as an accelerant (band wagoners) or retardant (skeptics) and their roles on the persistence or termination of trends.

For example, I saw former treasury secretary Paulson speak the other day and he went into TARP and the financial crisis. He seemed to feel the program, while very unpopular, really saved the economy.  It is possible, one or two people being unwilling to buck popular notions (bankers should not be bailed out, despite the consequences) can really swing the outcome of the global economy.

Can belief in the economics of Amazon or Twitter due to popular culture make the success happen?  Interesting to consider.  Many real estate deals pencil out or fail based on perceived desirability of the location.

Much food for thought.  Thanks.

Thanks to pizzasteve posts as well as links provided by brooklynguy in this thread. They provided a lot of food for thought indeed. This is a long post. I have put together my thoughts on what a DMI investor (specifically GEM) should worry about. You need to be familiar with GEM and its methodology to understand this analysis.

Followers of DMI (specifically GEM) are attracted to this investing methodology because of its eye popping over-performance relative to B&H in backtesting. However, this excellent Philosophical Economics blog http://www.philosophicaleconomics.com/2015/12/backtesting/ posted by brooklynguy demonstrates that relying on back testing alone without understanding why and how GEM works is very dangerous. Also it would be unwise to take comfort in a theory that momentum anomaly is real and it is sustainable.  Even if that is true, GEM is an algorithm, it has certain parameters with certain values recommended for those parameters. GEM can fail if the recommended values no longer work in the future. So one really need to understand how GEM parameters values interplayed with its context during the period of back testing. You also need to think if the environmental conditions that allowed past success will continue to persist in the future. Lets break this down to examining absolute momentum and relative momentum components of GEM.

Absolute Momentum (or Trend Following)

Again another article from Philosophical Economics blog http://www.philosophicaleconomics.com/2016/01/gtt/ (also link posted by brooklynguy) gives a very good framework to understand the variables involved. Absolute Momentum trades down-market gains (gain relative to B&H that is) to losses (again relative to B&H) due to whipsawing. Thus, Absolute Momentum’s performance depends on extracting higher gains than losses.  The parameters for implementing this strategy is monthly testing and 12 months of look back period. Both are critical - if you reduce/increase the testing frequency and/or look back periods, the returns from this strategy suffers. With these two parameters the way they are, the tug-of-war between gains and losses of this strategy breaks in favor of gains. Given the above background, we can draw the following observations about Absolute Momentum’s promise going forward.

  • Duration of business cycle: Lets say there are no business cycles that cause bull-bear market cycles. Then Absolute Momentum will underperform B&H. So performance of Absolute Momentum is inversely related to the average cycle time of one full business cycle (within reason of course - if the cycles are too short - say less than a couple of years, this won’t work either).
  • Depth of business cycles: The distance between peak to trough, the amplitude of the cycle is important. If this amplitude is shallower than historical averages, Absolute Momentum will underperform back testing promise. At a certain threshold, it will underperform B&H as well. This depth is proportional to momentum in the market. Herd mentality will drive the valuations up in a bull market and depresses them in bear markets. If momentum is arbitraged away in future, markets stay perfectly valued all the time. Obviously, that is NOT good for DM.
  • If the medium term (monthly time frame) volatility becomes much higher than historical averages the performance degrades due to increase in whipsaw losses.
  • If the market-drops at the end of bull markets and market-raises at the beginning of bull market are steeper than historical averages, then performance degrades. The test frequency and look back periods that worked in the past won’t work as well.
  • If US is no longer the leader of world markets in terms of leading world markets up/down, Absolute Momentum may not work as well in the future. The reason for this is GEM uses exclusively US market performance to get out of stocks.
Relative Momentum
  • If US and World ex US are not about the same size overall, the performance degrades. GEM depends on both them to be large so that they have enough, but just enough volatility in them. If you want to divide the entire world market into two, you get largest minimum size when the entire market is divided into equal pieces. If you take it extreme, if US becomes very small, it may be too volatile to make this work. That is why sector rotation underperforms GEM (because sector indexes are too volatile)
  • There is a phase difference between US and world economic cycles and in terms of their monetary and fiscal policies. One of the main reasons GEM is able to milk about 300 bps from Relative Momentum is not because US and world are not correlated, but because of dollar’s raise and fall. This phase difference in cycles must continue in the future for Relative Momentum's promise to be fulfilled.

Most people who do not fully understand GEM dismiss this as a market timing strategy. It IS based on marketing timing. However, it is also a very cleverly designed algorithm to capture momentum anomaly. Whether or not it will work in the future depends whether or not if we expect to have above outlined conditions of the past persist into future.

What I claim here is that the conditions outlines above captures most of the uncertainty with regard to GEM future performance. Can you think of any other factors?

How would you rank these risk factors?

My rank from top to bottom: AM-3, AM-4, AM-5, RM-1, RM-2, AM-1, AM-2
(AM - Absolute Momentum, RM - Relative Momentum, 1-5 refer to the numbered list in the corresponding sections)

How big are these risks? Based on this analysis, are you more confident or less confident that GEM can hold its promise?
« Last Edit: February 12, 2018, 04:50:21 PM by kober.paul »

RichMoose

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Re: Dual Momentum Investing
« Reply #1072 on: February 12, 2018, 04:53:35 PM »
Most people who do not fully understand GEM dismiss this as a market timing strategy. It IS based on marketing timing. However, it is also a very cleverly designed algorithm to capture momentum anomaly. Whether or not it will work in the future depends whether or not if we expect to have above outlined conditions of the past persist into future.

How big are these risks? Based on this analysis, are you more confident or less confident that GEM can hold its promise?
I think you hit the nail on the head right here. It's a sophisticated strategy (behind the scenes) that's very easy to execute for the average self-directed investor with some understanding of trade execution and discipline.

I personally feel it is not wise to ignore any strategy that's not a 60/40 (or similar) buy-and-hold. Many people like to think this is safe and reliable because it has been for U.S. investors over the past century. That said, if you were Japanese or German you might feel differently. There is nothing that precludes the U.S. market from suffering a multi-decade drawdown.

I'm not confident that GEM will continue it's outperformance. But all things considered, I am quite comfortable it will do reasonably well over the long term. I personally wouldn't invest 100% of my portfolio in GEM for this reason.

Most investors would probably benefit from running 2 (or more) different strategies across their total portfolio and re-balance every year or two. Some valid options might be:
1) DMI (GEM) on a 12-month system
2) Buy-and-hold a global market 60% Global Stocks / 40% Domestic bonds (Percentages just an example)
3) CTA / Managed futures
4) Value investing / dividend investing
5) Trend following with ETFs or large-cap stocks
6) Tail-risk / barbell strategy

I'm not saying any one of these will beat another over any medium term or a long time frame. But mixing a few might provide a bit of protection from catastrophe and advantages from good markets. Some might be inaccessible to the smaller investor, but most are pretty doable.

kober.paul

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Re: Dual Momentum Investing
« Reply #1073 on: February 13, 2018, 06:29:53 AM »
I'm not confident that GEM will continue it's outperformance. But all things considered, I am quite comfortable it will do reasonably well over the long term. I personally wouldn't invest 100% of my portfolio in GEM for this reason.
Are there any risk factors to GEM that you know other than what I identified above? Do you have an opinion about which risk(s) that we need to be most concerned about?

MustacheAndaHalf

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Re: Dual Momentum Investing
« Reply #1074 on: February 13, 2018, 06:57:21 AM »
The thing I trust the least about dual momentum is it's ability to step neatly out of the market during a crash, and step back in as the recovery breaks even.  When bonds have more momentum than stocks, the strategy switches to bonds. 

But could markets be volatile enough that checking every month isn't often enough?  If the crashing market takes place over 3 weeks, couldn't it take place between two updates?  Meaning at the start of September all was well, the market crashes -25% during September, and the very next month dual momentum suggests switching to bonds.  But that's after the losses have been realized.  Then, if the market recovers equally quickly, dual momentum is left in bonds until the next update.

In theory dual momentum switches out of the market quickly.  But in practice, with someone inexperienced using dual momentum, it could lag the market and suffer significant losses not seen in practice.  This wouldn't apply to someone who checks the market constantly, but would seem to be a problem for someone who doesn't want to check the dual momentum signals more than once a month.

RichMoose

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Re: Dual Momentum Investing
« Reply #1075 on: February 13, 2018, 07:02:38 AM »
Are there any risk factors to GEM that you know other than what I identified above? Do you have an opinion about which risk(s) that we need to be most concerned about?
When you invest, you are trying to profit from human behaviour. That could be the psychologically driven errors people make in investing specifically, or the larger macro factors that drive the markets.

It's dangerous to focus on the potential risks because they can easily be used as an excuse to exit a strategy that is precisely designed to take advantage of human behaviour.

For example, look at the Divvy Appreciation ETF (VIG). It's a big, big fund that normally it trades just 400,000 units per day. Would indicate to me that it's likely preferred by a Buy-and-Hold Investor. Then look at the volume on February 6 when CNBC/Bloomberg and the Zerohedgers were predicting total catastrophe. Volume went up to 3.5 million units (8.5x typical volume) with $350,000,000 turned over. Many, many investors who convinced themselves they were buy-and-hold investors probably sold at or near the market lows last week because they somehow were led to believe that buy-and-hold would fail them.

I think Gary takes a reasonable approach to the question of risk / failure of DM (GEM). If DM underperforms the market over an entire cycle then start asking questions. It's a great piece of insight because DM is not designed to outperform in all market conditions; it's designed to outperform over a market cycle while smoothing returns.

kober.paul

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Re: Dual Momentum Investing
« Reply #1076 on: February 13, 2018, 11:02:44 AM »
The thing I trust the least about dual momentum is it's ability to step neatly out of the market during a crash, and step back in as the recovery breaks even.  When bonds have more momentum than stocks, the strategy switches to bonds. 
From a business cycle point of view, during growth stage stock are going up. And the FED monetary policy is tightening to unwind previous excess and also to head off potential over heating  of economy and inflation (Exactly where we are right now). In this environment, bond prices drop and yields go up. When we enter recession, the FED is likely to engage is relaxing its policy to stimulate growth. This will make the bonds rally and yields to drop. That is the time when GEM will most likely have us in bonds. Am I missing something here?

Quote
But could markets be volatile enough that checking every month isn't often enough?  If the crashing market takes place over 3 weeks, couldn't it take place between two updates?  Meaning at the start of September all was well, the market crashes -25% during September, and the very next month dual momentum suggests switching to bonds.  But that's after the losses have been realized.  Then, if the market recovers equally quickly, dual momentum is left in bonds until the next update.
It could happen. However, GEM is doing a delicate balancing act. If it rebalances too aggressively and/or if shortens the look back period too much to be more responsive - the balance breaks to the side of higher whiplash losses which likely will negate any gain it made because of existing bear markets. The back testing confirms that this is a good balance. The real question to ask is if the stock market gyrations are going to be markedly different going forward. That is a risk one must take if they want to engage in using GEM. This risk is identified in my analysis as the top risk to GEM. AM-3.

Quote
In theory dual momentum switches out of the market quickly.  But in practice, with someone inexperienced using dual momentum, it could lag the market and suffer significant losses not seen in practice.  This wouldn't apply to someone who checks the market constantly, but would seem to be a problem for someone who doesn't want to check the dual momentum signals more than once a month.
That is incorrect. GEM won’t give any discretion to user on when to exit. You must follow the signals. It defines how often to check, how far you look back and when to exit and enter. Extremely easy to implement by a novice investor.

kober.paul

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Re: Dual Momentum Investing
« Reply #1077 on: February 13, 2018, 11:10:48 AM »
When you invest, you are trying to profit from human behaviour. That could be the psychologically driven errors people make in investing specifically, or the larger macro factors that drive the markets.

It's dangerous to focus on the potential risks because they can easily be used as an excuse to exit a strategy that is precisely designed to take advantage of human behaviour.
You are absolutely right. If you deploy GEM, I dont think you should continually use any discretion to second guess its signals. I am not recommending that at all. My analysis is geared toward deciding if one should use GEM. It has great results back testing. But that is not enough. We need to be convinced that the specific conditions that contributed to its higher performance in backtesting are likely to exist in future. That is the point of the above analysis. I did this mostly for myself. But I thought I discuss it with other so that I will be made aware of what I might be missing and also for others to make their own opinions about GEM. If at any point I realize I made a mistake, I don't mind dumping GEM and moving on to something else.
Quote
I think Gary takes a reasonable approach to the question of risk / failure of DM (GEM). If DM underperforms the market over an entire cycle then start asking questions. It's a great piece of insight because DM is not designed to outperform in all market conditions; it's designed to outperform over a market cycle while smoothing returns.
I would like to do a bit more due diligence of my own before picking up GEM. It is absolutely wrong to judge its performance before one full cycle. It is deliberately designed to trade performance in one part of the business cycle with another. However, for many, waiting one cycle (5-10 years) to judge its merits may not be an option. That includes me. I need to know now if I can reasonably trust GEM. To be more precise, I need to know if I can trust it more than any other option available to me.

MustacheAndaHalf

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Re: Dual Momentum Investing
« Reply #1078 on: February 13, 2018, 08:45:23 PM »
In theory dual momentum switches out of the market quickly.  But in practice, with someone inexperienced using dual momentum, it could lag the market and suffer significant losses not seen in practice.  This wouldn't apply to someone who checks the market constantly, but would seem to be a problem for someone who doesn't want to check the dual momentum signals more than once a month.
That is incorrect. GEM wont give any discretion to user on when to exit. You must follow the signals. It defines how often to check, how far you look back and when to exit and enter. Extremely easy to implement by a novice investor.
I'm curious about that, and thought a novice investor could check monthly.  Are you saying it's more often?  Can you give an example of how frequently a novice investor would need to check the dual momentum signals?  If it varies, you could give a specific example of the next 2-3 dates it needs to be checked.

CorpRaider

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Re: Dual Momentum Investing
« Reply #1079 on: February 14, 2018, 09:02:39 AM »
From what I've read, generally, trend following systems limit the number of test dates to reduce the number of potential whipsaws.  I think there is stuff on this in Stocks for the Long Run, Meb Faber's papers and on the Alpha Architect blog/site.

RichMoose

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Re: Dual Momentum Investing
« Reply #1080 on: February 14, 2018, 09:34:07 AM »
In theory dual momentum switches out of the market quickly.  But in practice, with someone inexperienced using dual momentum, it could lag the market and suffer significant losses not seen in practice.  This wouldn't apply to someone who checks the market constantly, but would seem to be a problem for someone who doesn't want to check the dual momentum signals more than once a month.
That is incorrect. GEM wont give any discretion to user on when to exit. You must follow the signals. It defines how often to check, how far you look back and when to exit and enter. Extremely easy to implement by a novice investor.
I'm curious about that, and thought a novice investor could check monthly.  Are you saying it's more often?  Can you give an example of how frequently a novice investor would need to check the dual momentum signals?  If it varies, you could give a specific example of the next 2-3 dates it needs to be checked.
I read a research report some time ago that suggested the optimal time for checking the signal over the last few decades was 20-25 trading days. I believe the research was done by Gogi Grewal, but unfortunately his website is no longer up.

Checking the signal more frequently than 20 trading days showed a significant decline in performance. My recollection was that frequent signal checking (and trading based on that signal) caused a lot more whipsaw trades.

On his website Gary suggests monthly is a good timeframe. Volume tends to go up in the last few days of one month and first few days of the next. This means the market is most liquid and the price is most correct. He also states that if the signal is close (barely indicating a change, or barely indicating a hold), it might be best to wait a few days and check back again when the trend is more confirmed. He made it sound like more of a peace-of-mind thing than this really having an impact on performance over the long term.

Edit* Found Gogi's research after some extensive digging: https://growresearch.com/blogs/blog/testing-momentum-s-robustness
« Last Edit: February 14, 2018, 02:51:09 PM by Mr. Rich Moose »

MustacheAndaHalf

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Re: Dual Momentum Investing
« Reply #1081 on: February 15, 2018, 08:47:27 PM »
https://growresearch.com/blogs/blog/global-equities-momentum-gem

That answers my question.  GEM is examined every month for signals that use 12 months of data.  Which means in theory a market crash could occur between updates, and GEM could get whipsawed.  But historically, that's not the most significant problem.

According to the data presented on that article, the larger problem is riding a volatile market by checking too often.  Someone who checks GEM signals every week will get whipsawed: they will switch investments only to see a trend reverse and cost them performance (in addition to trading costs).  So in practice, the larger problem is checking too often and being exposed too much to market volatility.

AdrianC

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Re: Dual Momentum Investing
« Reply #1082 on: February 16, 2018, 12:32:30 PM »
Yeah - I keep an excel sheet myself. At the end of the month, it takes a good minute or two to plug in the previous month's return numbers and the excel sheets spits out the signal for the next month. For those who don't want to keep such excel sheet, this site seem to provide a signal calculator. There seems to be some other sites as well that do this - http://www.scottsinvestments.com/dual-etf-momentum/. Quite frankly, I feel much better if I do it myself. It is easy enough.

Or use Stockcharts:

http://stockcharts.com/freecharts/perf.php?VTI,VXUS,BND,VGSH

Click the link, change time period to your desired lookback (e.g. 252 for 12 months). Currently in International, as it has been since June.

anisotropy

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Re: Dual Momentum Investing
« Reply #1083 on: February 16, 2018, 02:03:00 PM »

Absolute Momentum (or Trend Following)

Again another article from Philosophical Economics blog http://www.philosophicaleconomics.com/2016/01/gtt/ (also link posted by brooklynguy) gives a very good framework to understand the variables involved.

When I first came across GTT in mid-late 2016 I was horrified, mostly due to the similarities in underlying reasoning between GTT and my own timing method. Over time, that fear dissipated as I convinced myself that my method is infinitely superior to GTT. It is not, of course, but it helps me to sleep at night.

As perhaps the leading authority on market timing here (self proclaimed), I feel the need to remind other timers that our goal is not to maximize gains per se, but to simply outperform the market by following pre-defined rules and not get swayed by emotions.  There are a thousand ways to outperform the market, yet few investors ever achieve so. If the rules tell you to catch a falling knife, please just close your eyes and do it.

The business cycles follow fundamental laws of nature, much like how population distribution in a developed country follows the "law of 1/n". The environments change, but the rules stay the same.