By all accounts, my ETF strategy continues to be successful and performed well in July posting a 2.94% gain while maintaining an acceptable level of volatility. The system has now produced nine consecutive months of positive gains and has a CAGR of 10.7%. To be honest, a broadly diversified global basket of low-cost ETF’s has performed similarly so far this year. My system is designed to produce the greatest level of outperformance in bear markets as it will move to cash or likely Treasury ETF’s.
By the narrowest of margins, I can say that my momentum strategy has produced eight consecutive months of positive performance. My equity curve was essentially flat in June with a change in value of 0.02%. As volatility remains low in most asset classes, the annualized volatility of my equity chart was less than 10% for all of June.
A performance metric that my strategy has a high value for is the gain to pain ratio. A value above 2 is considered to be exceptional. That ratio is usually calculated over the previous three or five years and since my strategy has less than two years history it really is too early to make a judgement of the gain to pain ratio for it.
My largest holding for July is the gold ETF GLD which I haven’t held since last October.
This is getting repetitive but in a good way! Another month, another positive return. For May, my ETF momentum strategy produced a return of 1.76% The CAGR now stands at 9.7%. My Gain to Pain Ratio is 2.39 and my Profit Ratio is 1.74.
Even though I am using just under 30% leverage, annualized volatility remains comfortably low.
The past seven months make momentum investing seem easy but we all know that a slow, steady rising equity curve isn’t the norm especially for someone using leverage. Volatility will return at some point and I will reduce leverage as required.
As a DIY investor, I am a strong believer in measuring my trading/investing performance. As the saying goes, if you don’t measure it you won’t improve it.
I just started a subscription to Real Vision TV and began with the Peter Brandt series of videos. Peter Brandt who considers the Sharpe Ratio to be worthless for evaluating trading performance prefers, among a small number of other metrics, the Gain to Pain Ratio which was developed by Jack Schwager. In Brandt’s view, a Gain to Pain Ratio of 1 or better is quite good, a ratio of 2 or better is excellent and a ratio of 3 or better is world class.
The Gain to Pain Ratio is calculated by dividing the sum of monthly portfolio gains by the absolute value of monthly portfolio losses. Let’s calculate my Gain to Pain Ratio for my own ETF momentum trading system.
The sum of all the monthly returns is 10.74.
The absolute value of the losses (-1.80, -1.33, -2.10) is 5.23.
My Gain to Pain Ratio is 10.74 / 5.23 = 2.05
There is one proviso about the Ratio that Jack Schwager points out which we should all be aware of. You can read about that here.
My next post will be about the second metric that Peter Brandt uses which is Profit Ratio.
Since my early twenties, I have been a DIY investor as I find investing to be such a thought provoking field. For the most part, I have been a rules-based investor choosing systematic trading which is typical of an engineer.
Throughout the years, I have always sought ways to improve my investing. In my home office, perhaps just like yours, are a number of investing books. I have many of the classics but most are about systematic trading. While driving, I listen to a variety of audio podcasts but the bias is definitely tilted towards investing and finance.
There is education to be had through books and podcasts but, for me, there is something else that has been formative in leading to the investing style that I now engage in and am very comfortable with. The most important step for me has been publishing the results of my trading system here on this site. Having your own portfolio equity curve unfold over time in front of you is an absolutely humbling experience but it is instrumental to an investor’s skill development. Publishing your trading performance will greatly assist you in dealing with the emotions of being an investor. You learn not to be overconfident after a period of superior performance because “it too shall pass”. Poor performance is instructive in that it may teach you that your trading strategy is need of a tune up. A volatile equity curve may be just what you need to tweak your trading system such that it matches your personality (been there, done that).
My choice of publishing my trading performance has been Collective2 where I enter trades that match those in my personal accounts but are scaled for the different account size on Collective2. C2 was designed for futures traders more so than equity traders but it is the best I have found. If you are a DIY investor and are not already publishing your results, my suggestion would be to start a blog and publish your trading performance monthly. You don’t have to publicize your blog – it can be for your eyes only. If my experience is any indicator, over time seeing your equity curve will likely lead you down a path of finding ways to improve your trading performance and match your trading style to your personality.