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  • Naive Graham: Passive Investing According To The Master 47 comments
    Jun 15, 2014 10:29 AM

    In a 1963 lecture on the subject of Securities in an Insecure World, Benjamin Graham, the father of value investing and the guru of Warren Buffett, asserted that diversification between stocks and bonds was the true source of excess returns compared to the market. Specifically, he advised that the relative allocation to stocks and bonds should be between 25% and 75% one way or the other depending on the current state of the markets with respect to the value of the stocks. (http://business.financialpost.com/2013/04/26/benjamin-graham-revisited/ . See also, page 89 of the 2006 Edition of Graham's book, The Intelligent Investor)

    The Naïve Graham strategy, which is the simplest one that can be derived from Graham's idea - one that the he probably would not approve, though it difficult to say so definitively as the investment vehicles such as ETFs did not exist at that time - leads to results that are noteworthy. Prior to describing the details of the strategy, we summarize the results for a number of cases. For the purposes of comparison with much simpler buy and hold alternatives, also shown are the results for a small cap value fund, DFSVX, and a balanced fund PRWCX, both of which have historically yielded superior performance compared to their respective peers.

    Funds

    CAGR (%)

    Sharpe Ratio (Sortino)

    Max. Drawdown (%)

    Min. Annual Return (%)

    2003-2013 Two Fund Baskets

    VTI TLT (Market)

    12.7

    1.1 (2.0)

    14.3

    3.0

    IJJ TLT (Mid Cap Value)

    12.8

    1.0 (1.9)

    14.3

    4.6

    IJS TLT (Small Cap Value)

    13.1

    1.0 (1.9)

    15.4

    2.9

    DFSVX

    13.7

    0.6 (1.1)

    61.2

    -36.8

    PRWCX

    10.4

    0.8 (1.2)

    36.6

    -27.2

    2007-2013 Six Fund Baskets (component assets shown at the end of the post)

    Guggenheim Value

    12.9

    0.9 (1.4)

    24.6

    -7.15

    Guggenheim Growth

    17.1

    1.3 (2.4)

    15.8

    -0.9

    Vanguard Value

    13.35

    1.1 (1.95)

    13.6

    4.8

    Vanguard Growth

    14.8

    1.2 (2.0)

    20.1

    -6.6

    DFSVX

    6.8

    0.4(0.6)

    61.2

    -36.8

    PRWCX

    7.7

    0..6(0.8)

    36.6

    -27.2

    Inasmuch as the risk-based performance metrics are substantially better than those of the alternatives considered here, the strategy has much to recommend itself.

    The strategy entails rebalancing a basket of stock and bond ETFs at the beginning of every quarter on the basis of their relative returns during the immediately preceding quarter. The weights of the various ETFS are determined such that the total weights of each of the two classes of ETFs (stocks and bonds) are between 25% and 75% as advised by Graham.

    The Method for Two Fund Baskets

    This method applies to a basket of two funds, one a stock fund, and the other a bond fund.

    1. On the first trading day of every quarter, rank the two funds on the basis of their total return during the prior quarter.
    2. Allocate 75% of the portfolio to the top ranked ETF and 25% to the other.

    The Method for Six Fund Baskets

    This method applies to a basket of six funds, half of them being stock funds, and the rest bond funds.

    1. On the first trading day of every quarter, rank the six funds on the basis of their total return during the prior quarter.
    2. Allocate the following percentages of the portfolio to the various funds according to their ranks:

    Rank

    Weight (%)

    1

    35

    2

    25

    3

    15

    4

    12

    5

    8

    6

    5

    The precise values of the weights are not very important: the only requirement is that the total for the top three ranked funds be 75% and it be 25% for the bottom three funds (even the totals of 75% and 25% weights may be replaced by slightly different weights for stocks and bonds). If the rank-based weights are in decreasing order, the allocation is determined purely by relative strength: the funds with higher returns in a quarter are assumed to likely perform better than the other lower ranked funds in the next quarter.

    The following equity ETFs were used in the various baskets:

    1. Guggenheim Value: RPV RFV RZV
    2. Guggenheim Growth: RPG RFG RZG
    3. Vanguard Value: VTV VOE VBR
    4. Vanguard Growth: VUG VOT VBK

    The ETF TLT and the mutual funds FLBIX and VUSTX, all based on long term treasuries, were used for the bond portion of the six fund baskets. In actual implementation, once the weights at the beginning of a quarter are determined, FLBIX and VUSTX may be replaced by TLT. (Alternatively one may just use three copies of TLT in the computations, but for the sake of simplicity we have used three distinct funds here.)

    The main advantage of this strategy is that the allocation is determined without any complex computations, in sharp contrast to the other methods such as risk parity or the maximum diversified portfolio algorithm, and yet the returns are quite satisfactory. For the baskets considered here, the volatility of the returns and the maximum drawdown are also much lower than those of the stock funds alone. Just as the asset allocation methods that minimize volatility end up yielding portfolios which have superior returns over periods that span multiple market cycles, it appears that the portfolios whose allocation is based on returns alone may have low volatility.

    As an example, the equity growth curve and the allocation diagram for the Guggenheim Growth basket are shown in the following figures.

    Disclosure: The author is long IJS.

    Additional disclosure: This is not investment advice.

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Comments (47)
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  • Algyros
    , contributor
    Comments (101) | Send Message
     
    Thank you for posting this strategy. It's a wonderful eddy of sanity in a somewhat turbulent river.

     

    Do you have any reason to believe that the returns, as well as the drawdowns, wouldn't increase if one were to implement a Naive Graham strategy with leveraged ETFs?
    16 Jun, 06:07 PM Reply Like
  • varan
    , contributor
    Comments (3886) | Send Message
     
    Author’s reply » They definitely will increase. A first cut for (simulated) SSO and UBT suggests that the CAGR for the period 1991-2014 is around 20%, but the maximum drawdown is high as well in the low 30% range.

     

    Thanks.
    16 Jun, 11:00 PM Reply Like
  • bobswee
    , contributor
    Comments (11) | Send Message
     
    Any idea why Guggenheim Growth outperformed Vanguard by so much? I can trade Vanguard for free, but the difference in returns, if sustainable, more than offsets the fees to trade Guggenheim instead. Also, have you tried this simple strategy with a larger basket of stocks that included other asset classes besides U.S. stocks? Thanks.
    16 Jun, 07:55 PM Reply Like
  • bobswee
    , contributor
    Comments (11) | Send Message
     
    It's interesting to note that the three month test would have the Guggenheim growth portfolio totally out of stocks right now.
    16 Jun, 09:28 PM Reply Like
  • varan
    , contributor
    Comments (3886) | Send Message
     
    Author’s reply » @bobswee
    1. I have not tried other asset classes.

     

    2. Actually one interesting feature of this approach is that you are always invested in every asset. For the period starting on 4/1/2014, for the Guggenheim Growth basket, it went 75% into treasuries, 12% in RPG, 8% in RFG and 5 % in RZG. It was a (happy) fluke that the returns of all of these equity ETFs have been lower than the returns of the treasury funds during this period, though perhaps I am entitled to take credit for this precise call (see 4/01/2014 update for another similar strategy http://seekingalpha.co... ) :)

     

    3. There is no way to tell if the performance difference between the Vanguard and Guggenheim will persist in the future.

     

    Thanks for your interest.
    16 Jun, 10:56 PM Reply Like
  • 91656
    , contributor
    Comments (3) | Send Message
     
    Hi Varan,

     

    In reference to your other strategy, could I use the 5 VG ETF's with an additional bond ETF or just go with the original 5?

     

    "1. We will also follow the Vanguard ETF basket VTV, VOE, VBR with TLT and EDV."

     

    Would adding a short term bond such as VGSH be of use for those times nothing is going up, it would be your 35% allocation?

     

    Great post, Thanks
    19 Jun, 10:04 PM Reply Like
  • varan
    , contributor
    Comments (3886) | Send Message
     
    Author’s reply » In principle, yes. However, due to the more recent date of inception of VGSH the back tests could be done only starting in 2011, and the CAGR comes to 20%. Seems to be OK.

     

    The basket of VTV VOE VBR TLT VUSTX and SHY gives a CAGR of 13.1% during 2007-2014, with no year of loss, and drawdown of 12%. This appears to be quite a defensive basket.
    20 Jun, 11:13 AM Reply Like
  • bobswee
    , contributor
    Comments (11) | Send Message
     
    I'm wondering if a shorter time period, say every month looking back 3 months, etc. would produce a more accurate momentum change in a sector, or would that just result in more trades but not better results. Thanks.
    28 Jun, 06:37 PM Reply Like
  • varan
    , contributor
    Comments (3886) | Send Message
     
    Author’s reply » Slightly worse for monthly updates with 3 month look back for VTI/TLT, Gugenheim Value, and Gugenheim Growth. Probably not worth the effort.

     

    The little change from quarterly to monthly updates provides further evidence for the robustness of the strategy.
    28 Jun, 07:09 PM Reply Like
  • leonf675
    , contributor
    Comments (7) | Send Message
     
    Just to clarity... Wouldn't this strategy have us buy more of the asset class that got even more expensive and less of the class that didn't appreciate as much in the prior period? How is this a good deal if look at it from a real-world perspective?

     

    If markets are assumed to be trending for an extended period, it makes sense. Have you back tested this strategy for a period when the markets were oscillating?
    4 Jul, 07:47 PM Reply Like
  • varan
    , contributor
    Comments (3886) | Send Message
     
    Author’s reply » You are right that it will work only if the momentum persists for at least one quarter.

     

    The longest period I have studied is 1991-2014 with the basket FDVLX, FLPSX and two copies of VUSTX and the rank based weights [50% 25% 15% 10%].

     

    CAGR 13%
    Max Drawdown 16.9%
    Sharpe 1.1
    Sortino 2.0
    No. of years of losses 2 (2008 -4.1% 1999 -1%)

     

    Compared to the performance of various allocation/balanced funds, this is pretty good.

     

    Thanks.
    4 Jul, 08:07 PM Reply Like
  • leonf675
    , contributor
    Comments (7) | Send Message
     
    Thanks, right. - not bad.

     

    The only problem I have with your trend-following model is associating it with Benjamin Graham. Yes, he was a proponent of switching the allocation between bonds and stocks depending on the market conditions, but I don't think he advocated for continuing to investment more money into the asset class that went up in price.

     

    I re-read his lecture at http://bit.ly/1e6vJHQ and can't find any evidence to support such claim. If I missed something, please reply with a quote or page number.
    7 Jul, 12:02 AM Reply Like
  • varan
    , contributor
    Comments (3886) | Send Message
     
    Author’s reply » That's why I call it 'Naive' Graham.

     

    It takes his advice on reallocation when the market conditions dictate such an action, and on nothing else. As I said of the method, it is 'one that the he probably would not approve'. Clearly I have taken some liberties here.

     

    Thanks.
    7 Jul, 12:10 AM Reply Like
  • varan
    , contributor
    Comments (3886) | Send Message
     
    Author’s reply » Q2 2014 update

     

    Returns

     

    VTI/TLT Q2 4.8% Q1-Q2 9.5%
    IJJ/TLT Q2 5.1% Q1-Q2 11.2%
    IJS/TLT Q2 4.2% Q1-Q2 9.1%
    iShares Value Q2 4.5% Q1-Q2 9.4%
    iShares Growth Q2 4.3% Q1-Q2 8.4%
    Guggenheim Value Q2 4.6% Q1-Q2 9.6%
    Guggenheim Growth Q2 4.4% Q1-Q2 8.6%
    Vanguard Value Q2 4.6% Q1-Q2 10.2%
    Vanguard Growth Q2 4.3% Q1-Q2 8.7%
    Leveraged Q2 9.3% Q1-Q2 17.0%

     

    Allocations

     

    VTI/TLT TLT 75% VTI 25%
    IJJ/TLT IJJ 75% TLT 25%
    IJS/TLT TLT 75% IJS 25%
    iShares Value TLT 52% IJJ 35% IVE 8% IJS 5%
    iShares Growth TLT 52% IVW 35% IJK 8% IJT 5%
    Guggenheim Value TLT 52% RPV 35% RFV 8% RZV 5%
    Guggenheim Growth TLT 52% RPG 35% RZG 8% RFG 5%
    Vanguard Value TLT 52% VOE 35% VBR 8% VTV 5%
    Vanguard Growth TLT 52% VUG 35% VOT 8% VBK 5%
    Leveraged UBT 52% SSO 35% MVV 8% DDM 5%
    8 Jul, 03:07 PM Reply Like
  • bobswee
    , contributor
    Comments (11) | Send Message
     
    Are these allocations that were used during the 2nd quarter or the new allocations for the 3rd?
    9 Jul, 09:16 AM Reply Like
  • varan
    , contributor
    Comments (3886) | Send Message
     
    Author’s reply » New Allocations for the third.
    9 Jul, 09:30 AM Reply Like
  • bobswee
    , contributor
    Comments (11) | Send Message
     
    Re: the leveraged account, I show that UBT under performed the other three etf's for the second quarter. What am I missing?
    9 Jul, 10:28 AM Reply Like
  • varan
    , contributor
    Comments (3886) | Send Message
     
    Author’s reply » According to Yahoo Finance adjusted close prices for 3/31/2014 thru 6/30/2014 (which is the data source that I use), I get this:

     

    UBT 58.56 64.12 9.49% 2014/03/31 2014/06/30
    MVV 66.45 71.96 8.29% 2014/03/31 2014/06/30
    SSO 105.23 115.78 10.03% 2014/03/31 2014/06/30
    DDM 113.63 119.40 5.08% 2014/03/31 2014/06/30
    9 Jul, 11:23 AM Reply Like
  • BeDutch
    , contributor
    Comments (9) | Send Message
     
    Hi Varan, I am reading your posts with interest. I am specifically reacting here to your July 9th post, in which you confirm to use Yahoo historical as your data source. In some recent tests I was doing with these data, my curiosity was raised about their accuracy. There appear to be two issues.
    1 Yahoo seems to use the ExDiv for its price adjustments. In the real world the payout date is a different date and hence ( I THINK ), the strategies as we model them are not exactly replicable. I have not been able ( yet ) to determine how significant this issue is.
    2 while liking at issue 1, I also came across another, potentially more serious issue. I compared SPY data for a period from mid 2003 to mid 2004. I could not reconcile the adjusted numbers with the distributions during the period and the actual closing prices found in another credible ( UNADJUSTED) source.

     

    Have you looked into this and if so with what results?

     

    I look forward to hearing your ( or any other reader, s) opinion on this topic.
    1 Dec, 07:02 PM Reply Like
  • tmdoherty
    , contributor
    Comments (243) | Send Message
     
    @BeDutch:

     

    This is a known problem with Yahoo Finance historical data. It is littered with inaccuracies and omissions, particularly with respect to dividends. There are also issues with significant digits in the adjusted closing prices that lead to a lot of errors in ETFs and stocks where the share price drops below about 5.00 or so.

     

    I don't mean to suggest there are lots of these, but they do exist, and there doesn't seem to be any way to get Yahoo to fix them or even check them, as near as we've been able to determine.

     

    Cliff Smith has delved into this in some detail here on SA.

     

    TMD
    1 Dec, 07:11 PM Reply Like
  • varan
    , contributor
    Comments (3886) | Send Message
     
    Author’s reply » I think that only accurate and reliable sources with enough historical data to conduct any meaningful calculations are those for which you have to pay. I recognize the possibility of some problems with Yahoo, which is the only free source with substantial historical data, but I think that it is largely OK especially for the kind of strategies that have time frames of quarters or a year which are the only ones I am interested in.

     

    Thanks.
    1 Dec, 07:42 PM Reply Like
  • ikkyu
    , contributor
    Comments (225) | Send Message
     
    Wow. I tend to miss you posts. But I am going to follow much more closely.

     

    This is simple, elegant, and extremely well reasoned stuff.

     

    Many thanks for your sharing. Keep up the good work.

     

    Cheers from Osaka,

     

    john
    25 Jul, 08:18 AM Reply Like
  • ikkyu
    , contributor
    Comments (225) | Send Message
     
    BTW, I would do this with futures....

     

    Thanks.
    25 Jul, 08:21 AM Reply Like
  • varan
    , contributor
    Comments (3886) | Send Message
     
    Author’s reply » End of Q3 2014 Update

     

    YTD Returns

     

    VTI/TLT 12.6%
    IJJ/TLT 7.85%
    IJS/TLT 10.4%
    iShares Value 9.5%
    iShares Growth 10.7%
    Guggenheim Value 10.4%
    Guggenheim Growth 9.8%
    Vanguard Value 11.25%
    Vanguard Growth 11%
    Leveraged 20.9%

     

    Allocations

     

    VTI/TLT TLT 75% VTI 25%
    IJJ/TLT IJJ 25% TLT 75%
    IJS/TLT TLT 75% IJS 25%
    iShares Value TLT 75% IJJ 8% IVE 12% IJS 5%
    iShares Growth TLT 75% IVW 12% IJK 8% IJT 5%
    Guggenheim Value TLT 75% RPV 12% RFV 8% RZV 5%
    Guggenheim Growth TLT 75% RPG 12% RZG 8% RFG 5%
    Vanguard Value TLT 75% VOE 8% VBR 5% VTV 12%
    Vanguard Growth TLT 75% VUG 12% VOT 8% VBK 5%
    Leveraged UBT 75% SSO 8% MVV 5% DDM 12%

     

    This is not investment advice, of course. I am just trying to track the strategy over time as events unfold.
    1 Oct, 01:51 AM Reply Like
  • spielerman
    , contributor
    Comments (214) | Send Message
     
    Hi Varan,
    A couple of questions on your strategies here.

     

    How would you approach additional monthly contributions into these strategies (Native G, Balanced, etc)?

     

    Would you hold the cash until a quarterly adjustment, or invest twice a month, or monthly applying similar calculations in the mid term?
    6 Oct, 01:53 PM Reply Like
  • varan
    , contributor
    Comments (3886) | Send Message
     
    Author’s reply » Thanks for your interest.

     

    Without any transaction costs, or if the portfolio is large enough to render them insignificant, I would just buy the ETFs according to the weights computed at the beginning of the current quarter. Otherwise I will probably wait till the next quarter.

     

    All with the usual caveat that like everyone else I am just trying to wade through all this myself, and am not a financial advisor.
    6 Oct, 02:10 PM Reply Like
  • extremebanker
    , contributor
    Comments (1698) | Send Message
     
    SPY/IEF has a little less volatility and drawdown than using TLT. Performance is also lower.

     

    Another nice pair is VWEHX/IEF on a monthly basis. Nice performance and low volatility. Invest in VWEHX as long as it is above it's 6 month moving average. Otherwise, invest in IEF. Current holding is IEF.
    7 Oct, 09:28 AM Reply Like
  • varan
    , contributor
    Comments (3886) | Send Message
     
    Author’s reply » "Invest in VWEHX as long as it is above it's 6 month moving average. Otherwise, invest in IEF. "

     

    Why VWEHX? VTI with the 6 month SMA and IEF yields much more during 2004-2014 (13.8% vs 9.9%). If you replace IEF by TLT, the CAGR improves by 2%, and so any enhanced volatility appears to be justfied.

     

    Qurterly paired switching for VTI/TLT without any other filtering like SMA yields 15.5% during 2004-2014.
    7 Oct, 04:17 PM Reply Like
  • IndyDoc1
    , contributor
    Comments (145) | Send Message
     
    I am trying to trade on paper the short TMV/ short SSO based on who is the winner from TLT/ SPY. Trade on the beginning of every month based on the performance of the previous 3 months. I started with 50/50 allocation on September, but changed to 75/25 this months ( thanks to Naive Graham idea ). Despite a drop of 10 % of triple leveraged treasuries last month, the strategy is up 2% so far.
    7 Oct, 06:21 PM Reply Like
  • extremebanker
    , contributor
    Comments (1698) | Send Message
     
    Using SPY with converting to TLT if the six month moving average is violated yields CAGR of 16.3% with max drawdown of 18.9% and volatility of 14.3%.

     

    VWEHX converted to IEF upon violation of the six month moving average yields CAGR of 10.2% with max drawdown of 9.6% and volatility of only 5%.

     

    Some of us prefer less volatility.
    8 Oct, 10:14 AM Reply Like
  • IndyDoc1
    , contributor
    Comments (145) | Send Message
     
    Another nice strategy for pair switching. Thanks!
    8 Oct, 10:29 AM Reply Like
  • Algyros
    , contributor
    Comments (101) | Send Message
     
    I have a hard time understanding paper trading. Except, perhaps, for one who simply wishes to learn how to use a trading platform, it appears to be an essentially useless enterprise. Unless one wants to paper trade for five or ten years before actually investing, what useful information can be gleaned from paper trading?
    8 Oct, 07:58 AM Reply Like
  • IndyDoc1
    , contributor
    Comments (145) | Send Message
     
    I guess paper trading for me at least ( has not really tried it before) is more psychological.May be it will validates or invalidates certain concerns. May be some one will not like the 10 % that inverse leveraged treasuries suffered at some point last month, which it later recovered. This is especially true for strategies that can not be back tested reliably like shorting inverse leveraged funds or any other strategy for that matter.
    8 Oct, 10:03 AM Reply Like
  • varan
    , contributor
    Comments (3886) | Send Message
     
    Author’s reply » @algyros

     

    Good point.

     

    My purpose here to bring up some ideas, hopefully not that commonly known, that, on the basis of historical data, could have worked well, and have high probability of working in the future.

     

    There are quite a few articles on 'real time portfolios' on the site. They have their own educational value, and my purpose is to complement what is available in plenty rather than to just present one more showcase of look this is what I bought and this is how much I made.
    8 Oct, 11:50 AM Reply Like
  • varan
    , contributor
    Comments (3886) | Send Message
     
    Author’s reply » By the way, the return of SPY for the period 2009-2014, with CAGR of 16.1%, has been hard to match - there was even an article about it in WSJ.

     

    Surprisingly, the returns of all the Naive Graham based Growth portfolios - iShares (18.6%), Fidelity (18.8%), Guggenheim (20.5%) and Vanguard (19.1%) - would have handily surpassed the SPY returns during the same period. Fidelity Value (19.8%) and Guggenheim Value (18.2%) returns also would have been just as good.
    9 Oct, 12:35 AM Reply Like
  • varan
    , contributor
    Comments (3886) | Send Message
     
    Author’s reply » All Naive Graham portfolio positive today - Oct 10, 2014. Appears to be a simple defensive strategy.
    10 Oct, 06:12 PM Reply Like
  • IndyDoc1
    , contributor
    Comments (145) | Send Message
     
    Varan,

     

    It seems that Frank Grossmann has picked up a modified version of your Naive Graham strategy when he modified the GMR approach http://bit.ly/1HBWiSU

     

    The other interesting thing is that both Grossmann's and Cliff smith's out of sample bond strategies are doing well.
    23 Nov, 02:37 AM Reply Like
  • ikkyu
    , contributor
    Comments (225) | Send Message
     
    Hmmm. Interesting. In so far as Grossman takes into account the Sharpe (as he funkily calculates it) to compute the bond alloction, there is almost a sort of risk parity dimension to his modification as well. That seems a bit redundant, as he uses volatility to make his initial ranking.

     

    In think it would be better to use Varan's straight performance ranking and then the optimal Sharpe to give you an indication on the bonds. Though a straight 20% allocation to the 3x levered bond fund seems effective and simple too.

     

    Please correct me, if I am missing something.
    23 Nov, 08:56 AM Reply Like
  • varan
    , contributor
    Comments (3886) | Send Message
     
    Author’s reply » @indydoc

     

    thanks. I will take a look.
    23 Nov, 11:18 AM Reply Like
  • IndyDoc1
    , contributor
    Comments (145) | Send Message
     
    ikkyu,

     

    Your comment about the redundancy of using both volatility and sharpe ratio makes sense. It seems that momentum strategies lag the S&P 500 performance in strong secular bull markets. Buy and hold works the best in those situations. But it is winning by not losing is what will likely prevail at the end; a lesson learned from the crisis in 2009 as stated by Mbane Faber. Risk management will get you out of trouble during market downturns , which explain the resurge in interest in momentum strategies lately. On a different note, I am still amazed at the performance of the bond strategies!
    23 Nov, 10:18 AM Reply Like
  • ikkyu
    , contributor
    Comments (225) | Send Message
     
    Hey IndyDoc,

     

    [By the way, I am originally from Indy and a doctor of sorts]

     

    You are right. A higher volatility environment is when the momentum systems really shrine. I trade a variation on Maximum Yield Rotation. Short volatility provides a clearer risk-off/risk-on functionality in my opinion, but it is not for everyone. For MYR I don't see much improvement adding a bond component, but it switches bi-monthly.

     

    Varan showed me just how simple one can get. 50% SSO/50% UBT rebalanced quarterly is my new personal performance benchmark. It is tough to beat!

     

    Cheers from Osaka,

     

    john

     

    23 Nov, 06:20 PM Reply Like
  • IndyDoc1
    , contributor
    Comments (145) | Send Message
     
    John,

     

    I have been monitoring ( on paper ) shorting TMV and SPXS. For the last 2 1/2 months it returned 6.2 % despite a whopping loss of 15 % in TMV in the first 2 weeks of September. I am not using 50/50 but 70/30 with the winner of the last 3 months takes the bigger share; you can call it Naive Graham on steroids. It is similar to shorting TBT and SDS but with more return, volatility and maximal draw down.
    26 Nov, 02:37 AM Reply Like
  • ikkyu
    , contributor
    Comments (225) | Send Message
     
    Looking more at Grossman's adaptive bond allocation, I find it to be a rather elegant solution. The risk adjusted returns are much higher than his other models, even if the absolute returns are lower. By using TMF, and thereby adding leverage, I think you will have the best possible combination. It looks especially good with ZIV.

     

    Likewise, as Indydoc said, it is quite similar to Varan's line of thinking.
    24 Nov, 07:21 PM Reply Like
  • tmdoherty
    , contributor
    Comments (243) | Send Message
     
    @ikkyu:

     

    Personally, I would be very wary of ZIV. I've read the arguments for using ZIV, but I don't buy them. I trade volatility as well (although I don't mix that in with TAA or rotation or pairs strategies). For my purposes, XIV is a superior choice.

     

    Among the problems with ZIV is the fact that it is not very liquid (roughly 100K shares per day), and hence more subject to wide spreads, supply/demand imbalances, and especially, manipulation of price. And that happens. An example occurred on Tuesday (11/25/14). The VIX dropped almost 3%, and XIV (which like ZIV, does not track the VIX) went up 0.6%. But ZIV got killed, and dropped 1.6%. On the intraday chart, it looks to me like somebody was intentionally muscling down ZIV beginning at about mid-session, and that really intensified during the last hour or so of trading.

     

    Of course, XIV is more volatile and therefore is not a good fit form many who cannot tolerate that.

     

    TMD
    28 Nov, 09:32 PM Reply Like
  • ikkyu
    , contributor
    Comments (225) | Send Message
     
    Hello TMD,

     

    I appreciate your genuine energy and enthusiasm for these topics.

     

    I state "ZIV" as a proxy, but in general I actually short VIX futures in the middle of the curve. The curve has been much steeper at the front end than in the middle for the last week to 10 days, so movement my be a bit distorted. A 1.6% move would be nothing at all for XIV. On a risk adjusted basis ZIV is superior, and its volatility is closer to ETFs you would use in a momentum rotation.

     

    Cheers from Osaka,

     

    john
    28 Nov, 10:37 PM Reply Like
  • tmdoherty
    , contributor
    Comments (243) | Send Message
     
    Fair enough; to each his own I guess.

     

    Personally, I don't like to mix in volatility trading in TAA strategies. For one thing, they are just totally different strategies.

     

    Also, most TAA strategies reassess things either once or twice a month. I think one has to be much more vigilant with volatility trading; a lot can happen in a few weeks, and if XIV or ZIV is selected and the VIX decides to spike, you could be in a world of hurt in a hurry!

     

    So I trade TAA and volatility, but never in the same strategy, and not even in the same account.

     

    TMD
    29 Nov, 01:38 AM Reply Like
  • tmdoherty
    , contributor
    Comments (243) | Send Message
     
    Hi Varan,

     

    A couple of questions:

     

    1) Have you calculated rolling 12-month returns, especially mean/median values and SEs?

     

    2) Have you tested a composite strategy that trades both Vanguard Growth and Vanguard Value (or Guggenheim Growth/Guggenheim Value) simultaneously (50/50)?

     

    The reason for the first question is because I would like to get a better handle on the distribution of returns.

     

    The reason for the second question is because as I'm sure you are aware, growth regimes pass the baton to value regimes periodically. So it is conceivable that over longer periods of time, investing in both could produce a bit more consistent results by covering all bases.

     

    Thanks,

     

    Terence
    28 Nov, 10:00 PM Reply Like
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