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Lowell Herr  

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  • Back-Testing Results Are Filled With Uncertainty - Turn On Your 'Doubt Meter' [View article]
    Fred,

    I hope I am not repeating material you already know.

    1. If using only two ETFs such as SPY and TLT, TLT acts as a low volatile security and as such is a brake to major market declines. I prefer to use SHY as the cutoff ETF as it has very low volatility. This is the absolute momentum part of the strategy as one does not invest in ETFs that are under-performing the cutoff or "circuit breaker" ETF.
    2. The relative momentum operation kicks in when one ranks SPY with TLT or what other ETFs one might be using. Of course these ETFs need to be performing above the cutoff ETF (SHY in my case.)

    Using the combination of absolute and relative momentum is known as the Dual Momentum strategy - made famous by Gray Antonacci.

    The argument is that this combination of absolute and relative momentum styles will reduce portfolio volatility, minimize draw-downs, and increase the Return/Volatility ratio.

    Lowell
    http://itawealth.com
    Apr 18, 2015. 02:46 PM | Likes Like |Link to Comment
  • Back-Testing Results Are Filled With Uncertainty - Turn On Your 'Doubt Meter' [View article]
    Here is the link to an academic article titled, "Pseudo-Mathematics and Charlatanism: The Effects of Backtest Overfitting on Out-of-Sample Performance."

    http://bit.ly/1Eejs2Z

    The mathematics is minimized in this article compared to another one I read by some of the same authors.

    Lowell
    http://itawealth.com
    Apr 18, 2015. 02:29 PM | Likes Like |Link to Comment
  • Back-Testing Results Are Filled With Uncertainty - Turn On Your 'Doubt Meter' [View article]
    Back-Testing Enthusiasts:

    Here is a link that shines additional light on the subject of back-testing. There are embedded links within this link.

    http://bit.ly/1GUf6yc

    Lowell
    http://itawealth.com
    Apr 17, 2015. 01:50 PM | Likes Like |Link to Comment
  • Is It Time To Rethink An Allocation To Gold? [View article]
    Gary,

    Not yet is my position since GLD is still declining more per day over the past three months compared to the per day returns over the past six months. In other words, the absolute acceleration percentage is still negative. I would at least wait until the acceleration is positive.

    Lowell
    http://itawealth.com
    Apr 16, 2015. 04:51 PM | Likes Like |Link to Comment
  • Back-Testing Results Are Filled With Uncertainty - Turn On Your 'Doubt Meter' [View article]
    Back-Testing

    Investors interested in digging deeper into back-testing portfolios will find this blog of interest.

    http://bit.ly/1D6LS89

    Lowell
    Apr 16, 2015. 06:05 AM | Likes Like |Link to Comment
  • Back-Testing Results Are Filled With Uncertainty - Turn On Your 'Doubt Meter' [View article]
    Just a reminder.

    Let's keep to the topic of the article which is - beware of single back-test results as there are many inherent uncertainty factors that work their way into portfolio return and volatility conclusions.

    Lowell
    http://itawealth.com
    Apr 16, 2015. 05:06 AM | Likes Like |Link to Comment
  • Back-Testing Results Are Filled With Uncertainty - Turn On Your 'Doubt Meter' [View article]
    Hardog,

    In my article I attempted to identify factors that are under the control of a back-tester. While your list might impact the results, all but stock selection are out of our control. I even modified the stock selection variable by using ETFs.

    Lowell
    http://itawealth.com
    Apr 15, 2015. 01:23 PM | Likes Like |Link to Comment
  • Faber 10 Portfolio: Combining Low Correlated ETFs With Momentum Model [View article]
    User,

    I hope your read my article on back-testing.

    http://seekingalpha.co...

    One of the most tested portfolios can be found on my blog and it is the Rutherford Portfolio. Not all blogs related to this portfolio are available without a Platinum membership.

    Lowell
    Apr 14, 2015. 01:01 PM | Likes Like |Link to Comment
  • Faber 10 Portfolio: Combining Low Correlated ETFs With Momentum Model [View article]
    Noumann,

    I am using 182 calendar days for the correlation analysis look-back.

    Lowell
    http://itawealth.com
    Apr 14, 2015. 11:45 AM | Likes Like |Link to Comment
  • Back-Testing Results Are Filled With Uncertainty - Turn On Your 'Doubt Meter' [View article]
    TMD,

    I agree with your points above and here is how I attempt to "cure" the problems. My "solutions" match the answers you have provided.

    1. The 33-day portfolio reviews also include running a fresh correlation analysis as well as ETF rankings. This is the dynamic (adaptive) model of which you speak.

    2. You answered the second problem as well. In addition to using SHY as the cutoff or "circuit breaker" ETF when a 2008 bear market strikes and all securities become highly correlated, the ETF ranking spreadsheet (not pictured) also includes addition warning triggers of when to exit the market. Whipsaws continue to be a nagging problem in flat markets. Waiting 33 days to update a portfolio helps to reduce the impact of whipsaws.

    3. To handle the problem of both securities being highly correlated and going in the wrong direction, I use more than three or four ETFs as potential building block candidates. How I attempt to manage this might be the theme of another article.

    Thanks for your comments as they are spot on.

    Lowell
    http://itawealth.com
    Apr 14, 2015. 06:39 AM | Likes Like |Link to Comment
  • Back-Testing Results Are Filled With Uncertainty - Turn On Your 'Doubt Meter' [View article]
    Fred,

    I show in the above article that TLT made a significant (positive) impact on the returns. That may not be repeated in the future. At least I would not count on it.

    There are several factors that color back-testing results. 1) Choice of securities. 2) Start and stop dates. 3) Look-back period. 4) Number of days between portfolio review. These are four biggies.

    Lowell
    http://itawealth.com
    Apr 13, 2015. 04:30 PM | 1 Like Like |Link to Comment
  • Back-Testing Results Are Filled With Uncertainty - Turn On Your 'Doubt Meter' [View article]
    Pete,

    What you suggest is partially what I'm doing on my blog. 1) I'm tracking 14 portfolios with the review periods occurring every 33 days so the portfolio updates are scattered throughout the month. 2) While there is a lot of overlap when it comes to the ETFs used to populate the portfolios, there are variations. 3) There are slight variations in how the momentum model is applied. 4) Portfolio IRR values are reported each week along with performance trends compared to what was happening six weeks ago and one year ago.

    Yes, it takes a lot of effort to keep all this up, but that is what the blog is all about. If you are interested in a sample portfolio (not a real one on my blog) check out this link.

    http://seekingalpha.co...

    Lowell
    http://itawealth.com
    Apr 13, 2015. 04:10 PM | 1 Like Like |Link to Comment
  • Back-Testing Results Are Filled With Uncertainty - Turn On Your 'Doubt Meter' [View article]
    Pete,

    " There's clearly a significant amount of excess return to be gained (or lost) by any a priori choice of review dates."

    Correct. Uncertainty of return is what back-testing is showing at this end. This is one of the uncertainties listed above and why readers need to be skeptical when they see a specific single return result from one back-test.

    Lowell
    http://itawealth.com
    Apr 12, 2015. 05:11 PM | Likes Like |Link to Comment
  • Back-Testing Results Are Filled With Uncertainty - Turn On Your 'Doubt Meter' [View article]
    Varan,

    One of my next projects is to take the commission free ETFs provided through TD Ameritrade and run correlation analysis until I cull the number to something under 15. I suspect the number will come in under 10 as I know right out of the corral many are highly correlated. Once I have low correlated ETFs isolated, then run a similar analysis as was performed on the ETFs for this article. I expect similar winning results.

    Lowell
    http://itawealth.com
    Apr 12, 2015. 03:40 PM | Likes Like |Link to Comment
  • Back-Testing Results Are Filled With Uncertainty - Turn On Your 'Doubt Meter' [View article]
    Hi Varan,

    Point #1 above: I totally agree with your point. To carry this argument one step further, a portfolio benchmark should also be available for investing.

    Point #2: SHY is included as a low volatile ETF in an effort to keep one out of major bear markets. As a practical matter, I have yet to find myself in a situation where I was fully invested in SHY.

    An investor has a high probability of achieving positive returns by using VTI, VEA, and a bond ETF such as TLT, BIV, or BND to construct their portfolio.

    Point #3: The more I read from the Dual Momentum book the less I see that is all that different from articles that go under the name of "Adaptive Asset Allocation." It seems as if every author is seeking a special title to distinguish similar momentum models.

    Lowell
    http://itawealth.com
    Apr 12, 2015. 11:27 AM | Likes Like |Link to Comment
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