In this post i will share with you some of my investment strategy development experience .
First some basic terminology :
Sector rotation -sector rotation is the act of shifting (investing) your money from one sector of the economy to another .
ROC = rate of change = [(Close - Close n periods ago) / (Close n periods ago)] * 100
We will trade the following Fidelity sector funds ,each represent a deferent sector :FSCPX , FSPTX ,FSPHX,FSDPX,FSUTX,FRESX,FSRFX,FCLTX .
The strategy :Selecting the fund with highest ROC score, and holding it for 4 weeks.
we will start with ROC(4) - that means we will peak the fund with highest 4 weeks rate of change .
Strategy1 results 1994-2013 :
annual return : 8.85%
sharpe ratio : 0.26
Max system drawdown : -58.09%
We can see that this strategy is not giving us very good results .
lets try to use ROC(12) - that means we will peak the fund with highest 12 weeks rate of change .
Strategy2 results 1994-2013 :
annual return : 9.82%
sharpe ratio : 0.29
Max system drawdown : -60.61%
Results are a little better but still Max drawdown is very big.
Lets try and reduce Max drawdown by adding a bond fund : VBMFX this will enable the strategy to rotate to safer assets (bonds) during bear market, we will still be using ROC(12).
Strategy3 results 1994-2013 :
annual return : 8.58%
sharpe ratio : 0.27
Max system drawdown : -43.14%
we managed to decrease the drawdown but the annual return also went lower.
Now lets try to twist the strategy a bit and get a better return ,
Instead of using ROC(12) i will use ROC(12) delayed by 4 weeks, that will lower the chances of peaking sector which had very high positive momentum in the last 4 weeks which usually leads to negative price correction.
Strategy4 results 1994-2013 :
annual return : 11.8%
sharpe ratio : 0.41
Max system drawdown : -39.29%
Wow , now we can see a change , the annual return and the sharpe ration are much better, even the drawdown is a little better.
It is still far from being a strategy i will put my money in but it is a nice learning experience.
Hope you enjoyed it,
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.