By now you are well aware that 2015 was a tough year for investors and I expect most had a negative performance last year. I like to refer to a global passive portfolio constructed with seven ETF’s as a benchmark. The global portfolio is constructed as per the weights for the ETF’s noted in the table below.
The global passive portfolio declined by 2.1% based on monthly rebalancing in 2015.
As can be seen in the above chart, the global portfolio is essentially unchanged from where it was at the end of 2013. What lays ahead of us for investment returns is anybody’s guess. Despite what you see in the financial media, that’s all it is, a guess. In my opinion, the best you can do as an investor is use one or more of the proven factors such as size, momentum or value in a rules-based trading strategy to your advantage. To that end, I have just initiated a third momentum strategy focusing on small cap US stocks. For my own account, I have allocated funds to each of my three strategies (all Pure Momentum strategies can be found on Collective2) with a goal of outperforming the global passive portfolio in 2016.
If you have your own web site, have you ever tested for broken links? The more broken links a web site has, the lower its Google Ranking will be. I don’t profess to be an expert in this field but I recently ran a test on my site and found that a number of links no longer were valid so I fixed them. If you want to determine whether your site has broken links, you can use a free service at Broken Link Checker.
One other means of improving a site’s Google ranking is to make it mobile friendly. Google provides a free service that checks your site to ensure it is mobile friendly which you can find here.
Of course, there are companies that provide comprehensive site analytics for a price but I thought I would pass this information along for the DIYers.
On October 30, I began trading Pure Momentum II which is a new momentum-based strategy that takes long positions in large cap, high quality U.S. stocks. Holding periods will typically be in the one to two month range.
Positions are currently held in Autodesk, Amazon, Baidu, KLA-Tencor, Microsoft, Nvidia and Sandisk. So far, NVDA is the best performer with an 18.9% gain over the initial purchase price. These are very early days but, for what it is worth, the strategy is outperforming the S&P 500.
This strategy is 100% rule-based. I do not review the news, forecasts, analyst recommendations, etc relating to any of the stocks. Price and only price is used for stock selection. There will be no emotional attachment to stocks – when my strategy determines that a stock is to be sold, it will be sold regardless of how positive the story-of-the-day is for that stock.
For the record, I have allocated a portion of my personal account to this new stock trading strategy and intend to increase the allocation to a maximum of 50% over the coming year. As this is a stock-only strategy, it should not have a 100% allocation. Like all stock trading strategies, we can expect drawdowns and we should base allocations on our own personal tolerance to such drawdowns. That said, I have full confidence that this strategy will provide a better return than buying-and-holding the broad US stock market vis-a-vis SPY.
You can check the performance of the Pure Momentum II trading strategy anytime by going here and reviewing statistics provided by Collective2.
If you are a regular reader of my posts then there is a good chance that you are aware of Superforecasting by Philip Tetlock and Dan Gardner. I am currently reading Superforecasting and not going to post a review as many others have already done so on Amazon. Should you be a systematic trader who understands the role of probability in trading, I am confident that you will enjoy this book.
The following is taken from the description of the book on Amazon:
In Superforecasting, Tetlock and coauthor Dan Gardner offer a masterwork on prediction, drawing on decades of research and the results of a massive, government-funded forecasting tournament. The Good Judgment Project involves tens of thousands of ordinary people—including a Brooklyn filmmaker, a retired pipe installer, and a former ballroom dancer—who set out to forecast global events. Some of the volunteers have turned out to be astonishingly good. They’ve beaten other benchmarks, competitors, and prediction markets. They’ve even beaten the collective judgment of intelligence analysts with access to classified information. They are “superforecasters.”
In this groundbreaking and accessible book, Tetlock and Gardner show us how we can learn from this elite group. Weaving together stories of forecasting successes (the raid on Osama bin Laden’s compound) and failures (the Bay of Pigs) and interviews with a range of high-level decision makers, from David Petraeus to Robert Rubin, they show that good forecasting doesn’t require powerful computers or arcane methods. It involves gathering evidence from a variety of sources, thinking probabilistically, working in teams, keeping score, and being willing to admit error and change course. Superforecasting offers the first demonstrably effective way to improve our ability to predict the future—whether in business, finance, politics, international affairs, or daily life—and is destined to become a modern classic.
My ETF momentum model declined by 0.4% last month.
I gauge the performance of my ETF momentum trading system in a number of ways. First I compare its performance to that of a passive global ETF strategy.
The passive strategy is constructed with ETF allocations as per the table below.
The basis for the composition of this global portfolio is a research paper written by Ronald Doeswijk and others as discussed at Gestaltu.
In order to determine if my trading strategy is adding value versus a buy-and-hold approach, I compare the performance of Pure Momentum to the average of the ETF’s in the basket that I select from.
Finally, I compare my performance against a professionally managed fund that employs a similar momentum strategy applied to asset classes. Cambria Global Momentum ETF has a strategy that is very similar to the one behind Pure Momentum.
For the best part of this system’s first year of live trading it outperformed the benchmarks I use. However, it is currently lagging those benchmarks but not by enough for me to be concerned.
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