# More Active Investing Role - Did it help you?



## cainvest (May 1, 2013)

I had a retirement savings review at my bank a few weeks back and it got the gears turning, thinking more about those days which are closer than farther away now. With only 10-15 years of work left I thought I'd better start looking at things a little more closely. One area I wondered about was my investment strategy which basically has been, look at the portfolio a few times a year and make minor adjustments. So I guess my question is for those who started from a point like this, did a more active investing role gain you better returns?


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## 6811 (Jan 1, 2013)

cainvest said:


> I had a retirement savings review at my bank a few weeks back and it got the gears turning, thinking more about those days which are closer than farther away now. With only 10-15 years of work left I thought I'd better start looking at things a little more closely. One area I wondered about was my investment strategy which basically has been, look at the portfolio a few times a year and make minor adjustments. So I guess my question is for those who started from a point like this, did a more active investing role gain you better returns?


Yes, it did. Taking charge of my investments was the best thing I ever did. 

Of the many books I have read on investing and taking charge of your own investments I found "The Smartest Investment Book You'll Ever Read" (Daniel Solin, CANADIAN EDITION) the most helpful in gradually weaning me away from the bank and mutual fund companies that were killing my savings, and moving my money into a couch potato type of ETF investment strategy that made an instant improvement to my returns. 

A few other books I found helpful were: The wealthy Barber, David Chilton; Smoke and Mirrors, David Trahair; and of course The Intelligent Investor, Benjamin Graham. For general reference I use "Stock Investing for Canadians for Dummies".

Good luck on your investing, no matter what tools you decide to use.


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## Spudd (Oct 11, 2011)

I was couch potato all the way, then about 2 years ago I decided to start trying to "beat the market". I feel I have increased my stress level and the results I'm getting are not worth it. I'm planning to go mainly back to couch potato.


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## Four Pillars (Apr 5, 2009)

I'm not sure by 'active' if you are referring to anyone who diys or someone who is not a couch potato.

I'm a coucher all the way. Compared to a high fee retail situation (ie 2.25-2.5% MER), pretty much any kind of reasonable diy investment strategy (couch potato or active management) has a good chance of higher performance.

Of course, if you have a smaller portfolio and/or if you are getting a lot of service (not likely) with those high mers, then going diy might not help.


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## kcowan (Jul 1, 2010)

The main thing is to minimize fees. Once you do that, there is little leverage.

Becoming an active investor can be fun but it is essentially another job that you are taking on. If you have the interest, give it a try.


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## cainvest (May 1, 2013)

Thanks for the viewpoints everyone.

Low MER investing (ETFs mainly) is one area I will do some shifting into. I currently own zero ETFs but do own a some lower MER mutuals, I good portion are in the 2+ range though and will get "adjusted" shortly. 

By active, I mean an approach that is not exactly a couch potato strategy but far from "I'm going to Vegas and dropping this on Red!". I guess a few examples might help here, so kind of along these lines,
- Partial portfolio pull out to a cash position and/or hold back investing when a correction is near.
- Use of shorter term sector ETFs

I understand the risks are greater with an active approach like this, after all, if it was a sure thing everyone would do it!


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## andrewf (Mar 1, 2010)

The risk is higher, and the evidence that you can produce better returns is pretty scant. It's not just a matter of more risk-->more potential reward. It's more risk-->probability of lower return.


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## Squash500 (May 16, 2009)

6811 said:


> Yes, it did. Taking charge of my investments was the best thing I ever did.
> 
> Of the many books I have read on investing and taking charge of your own investments I found "The Smartest Investment Book You'll Ever Read" (Daniel Solin, CANADIAN EDITION) the most helpful in gradually weaning me away from the bank and mutual fund companies that were killing my savings, and moving my money into a couch potato type of ETF investment strategy that made an instant improvement to my returns.
> 
> ...


I totally agree that the Daniel Solin book was excellent.


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## Islenska (May 4, 2011)

I really enjoy doing my own, have been for many years,had lots of dogs along the way, but some success and pretty much set up for a liveable return now thru divs and interest.
Honestly don't find it stressfull , surviving 2008 and feel it cannot get worse than that in our time.
Option trading takes care of my gambling needs and the rest like SLF or BNS just coast along.
So much to learn and every day is different!
`


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## OptsyEagle (Nov 29, 2009)

cainvest said:


> By active, I mean an approach that is not exactly a couch potato strategy but far from "I'm going to Vegas and dropping this on Red!". I guess a few examples might help here, so kind of along these lines,
> - Partial portfolio pull out to a cash position and/or hold back investing when a correction is near.
> - Use of shorter term sector ETFs
> 
> I understand the risks are greater with an active approach like this, after all, if it was a sure thing everyone would do it!


You just uncovered the only downside to taking an active approach. When you are monitoring your investments very closely, it is very difficult to resist the urge to do what you just suggested. If you do, you will find the cost to you will be much greater then anything your previous advisor/manager charged you ...9 times out of 10 (there is always some lucky person who wins that 10th time and brags about it or starts a blog and keeps us all wanting to try).

The other costly endeavour is the constant changing of strategy. One starts out saying, "hey, I will be a couch potato and save 2% a year". Then, after a May to July correction, they say "hey, I will be a SELL IN MAY investor". Then they read a book about emerging Tibit or whatnot and put way to big of allocation there. Then there a gold bug. Then they hedge all currencies. Then they unhedge all currencies, etc. etc. etc. This is also very costly not only in money but in the incredible amount of time it takes for you to realize it is a complete waste of time.

If you DIY and invest in a couch potato type portfolio, set up a well thought out investment policy around it, put it in action and then pretty much ignore it for 364 days out of a year, then taking control will work. If you get cute ... you will get poorer. 

All this is my opinion ... and many, many years of my experience.


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## GoldStone (Mar 6, 2011)

cainvest said:


> Low MER investing (ETFs mainly) is one area I will do some shifting into. I currently own zero ETFs but do own a some lower MER mutuals, I good portion are in the 2+ range though and will get "adjusted" shortly.


Great idea. Saving 2%+ annually on MERs is a low hanging fruit and a no-brainer.



cainvest said:


> By active, I mean an approach that is not exactly a couch potato strategy but far from "I'm going to Vegas and dropping this on Red!". I guess a few examples might help here, so kind of along these lines,
> - Partial portfolio pull out to a cash position and/or hold back investing when a correction is near.
> - Use of shorter term sector ETFs


How would you know a correction is near? How would you know which sector will get hot next? Do you have a crystal ball? Can I borrow it? 

BTW, the advice you received so far from other posters has been top notch. Pay close attention to what they sad.


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## cainvest (May 1, 2013)

GoldStone said:


> How would you know a correction is near? How would you know which sector will get hot next? Do you have a crystal ball? Can I borrow it?


Well you see I've got this special computer system and ..... just kidding 

Thanks to all for the straight forward investing advice, stay on track, lower costs when possible, etc. 
And while I do not have a crystal ball there are many "indicators" when a market correction is due. Acting on those indicators is a whole different story as well as capturing gains from those actions.


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## Eder (Feb 16, 2011)

Indicators pointing to a lower market are obvious to almost everyone and is currently fully priced in and will be unprofitable to trade on...otoh flipping a coin will be as reliable as trading on aforementioned indicators and probably a less emotional decision.


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## My Own Advisor (Sep 24, 2012)

Taking charge of my investments was the best thing I ever did. 

Looking back at my 20s, I wish I was DIY back then. Such is life. Live and learn and make mistakes and learn some more.


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## cainvest (May 1, 2013)

Eder said:


> Indicators pointing to a lower market are obvious to almost everyone and is currently fully priced in and will be unprofitable to trade on...otoh flipping a coin will be as reliable as trading on aforementioned indicators and probably a less emotional decision.


So you honestly don't think there is any strategy to capture addition gains during market corrections? IMO, I'm not sure either but it is interesting trying to apply a rule set that works for these periods as they will occur.


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## cainvest (May 1, 2013)

Just to provide a simple rule set example,

- Only applies to monthly investments into equities, lets say S&P500 for this example
- Stop monthly buying when the 50 and 300 MA are both negative, instead put money into ISA or equiv.
- Start buying again when 50 rises above the 300 MA (incl. money you put into ISA)

So what do people see wrong with this?


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## Four Pillars (Apr 5, 2009)

cainvest said:


> Just to provide a simple rule set example,
> 
> ...
> 
> So what do people see wrong with this?


Nothing, except that it might work or it might not.

Of the active investors that I've noticed in the forums, some are pretty successful and some are not. You really just have to give it a shot, measure your results and go from there.


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## HaroldCrump (Jun 10, 2009)

cainvest said:


> - Stop monthly buying when the 50 and 300 MA are both negative, instead put money into ISA or equiv.
> - Start buying again when 50 rises above the 300 MA (incl. money you put into ISA)


You mean the 200 DMA, right? Not 300.


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## GoldStone (Mar 6, 2011)

cainvest said:


> So what do people see wrong with this?


It doesn't matter what we see or don't see.

Have you backtested your strategy?

Download S&P500 prices going back as far as possible. A few decades at a minimum. Backtest your rules vs. Buy Whenever You Have Money & Hold. The backtesting should take into account dividends, commissions and spreads.

If you like the results, backtest the same strategy on other asset classes. TSX, Small Caps, International Equities, REITs.

Please let us know what you find.


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## cainvest (May 1, 2013)

HaroldCrump said:


> You mean the 200 DMA, right? Not 300.


Nope, 300 day. Of course this value can be tweaked but its just meant to catch major corrections.



GoldStone said:


> It doesn't matter what we see or don't see.
> 
> Have you backtested your strategy?
> 
> ...


I did some back testing on the S&P500 going back to 1990 and it appears to work on the surface. Now here is where my lack of investment knowledge comes in, how do I account for dividends and spreads? Do yahoo charts charts take these into account (probably not dividends I gather)?


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## GoldStone (Mar 6, 2011)

cainvest said:


> I did some back testing on the S&P500 going back to 1990 and it appears to work on the surface. Now here is where my lack of investment knowledge comes in, how do I account for dividends and spreads? Do yahoo charts charts take these into account (probably not dividends I gather)?


Charts are not precise enough to backtest. You need to download the historic closing prices.

http://finance.yahoo.com/q/hp?s=^GSPC+Historical+Prices

Adj Close column accounts for dividends. Working with adjusted close is not straightforward. Google around to find more info.

Luckily for you, Mebane Faber published a paper on a similar timing model. IIRC, he used 10 months SMA. Not the same as 300 days, but close enough. His strategy tests the price once a month to reduce whipsawing.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461


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## cainvest (May 1, 2013)

I saw the dividend data is available so that is good, I'll download the data to work up a better model.
Thanks for the link to that paper, I'll read it later on.


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## cainvest (May 1, 2013)

Many thanks GoldStone, that article was very good! 

Its almost unbelieveable that a simple rule set like that works so well. I'm not even sure if I'll attempt to refine that or just use it as stated. Of course my rule set posted earlier was much less aggressive as it only affected buying, maybe this model with a slight hedge factor applied to it, say only 50-75% of equities sold instead of 100%, might work fine for me.


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## GoldStone (Mar 6, 2011)

It's very easy to use the model as stated. The timing charts are available for free on his web site. I keep a close eye on them. My portfolio was hammered in 2000-01 and 2008. 2008 hurt badly. Even though my portfolio has recovered nicely since 2008, I'm hell bent on avoiding a three-peat. This is becoming increasingly important as I approach retirement.



> Its almost unbelieveable that a simple rule set like that works so well.


Keep in mind, the model worked well in a spreadsheet looking backwards in time. We don't know how well it will work in real life in the next market crisis. A timing model can whipsaw you to death.

A simple example:
1. Markets crash 20%.
2. The model sends a sell signal at the end of the month.
3. You get out of the markets.
4. The markets recover quickly in the next month, before you get a buy signal at the next month end.
*** You are screwed ***


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## fraser (May 15, 2010)

Yes and no. We dealt with a big bank and a stockbroker a year or so prior to retirement. We had busy lives and were complacent in this regard. I think this is what the banks count on....complacency and their overblown reputations.

In preparation for retirement, we reviewed all of our financial dealings from investments to expenditures. The result was that we moved to a fee for service investment firm. We meet with our advisor on a regular basis and take a much more active role in setting strategy-based upon the advisor's advice. And the advice is wrapped around a tax stategy. So yes, we do take a more active role than we did, especially my spouse, we are using an adviser, and we are very pleased with the returns. But we do not select and track specific equites other than a few that we kept in a discount brokerage account. These will eventually be sold.

I worry when it comes to asset depletion/investments. In the past we were fortunate to do extremely well with high tech. We sold just in time but the thought of what could have transpired had we not sold our equity position has made us a little gun shy.


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## cainvest (May 1, 2013)

GoldStone said:


> It's very easy to use the model as stated. The timing charts are available for free on his web site. I keep a close eye on them. My portfolio was hammered in 2000-01 and 2008. 2008 hurt badly. Even though my portfolio has recovered nicely since 2008, I'm hell bent on avoiding a three-peat. This is becoming increasingly important as I approach retirement.


I fared better in 2001 than 2008, I'll admit some luck/external advice was involved in 2001 (big sale) and in 2008 I saved a little with a few sales and then a little more by withholding current investments. 



GoldStone said:


> Keep in mind, the model worked well in a spreadsheet looking backwards in time. We don't know how well it will work in real life in the next market crisis. A timing model can whipsaw you to death.
> 
> A simple example:
> 1. Markets crash 20%.
> ...


You do have to buy into the model, second guessing isn't a good idea when things go bad. As with all investments risk is involved and there will almost always be exceptions to the rule. This timing model is far less likely to whipsaw you out given the long MA and that's what you need to weigh against riding out another downturn. Could there be a better model, maybe .. but you'll end up playing "what if senarios" all day trying to assure yourself its the right method to follow. And like I said in my previous post, maybe hedge a little by leaving half in ... your comfort level sets the rules.

And remember, you don't have to "win" everytime you just have to win more than you lose. Granted this is easier to take when you're not to close to retirement.


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## GoldStone (Mar 6, 2011)

cainvest said:


> You do have to buy into the model, *second guessing isn't a good idea when things go bad*.
> ...
> And like I said in my previous post, *maybe hedge a little by leaving half in* ... your comfort level sets the rules.


One of these statements is not like the other. 

Which goes to show... simple rules are not easy to follow. Human emotions get in the way.


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## cainvest (May 1, 2013)

GoldStone said:


> One of these statements is not like the other.
> 
> Which goes to show... simple rules are not easy to follow. Human emotions get in the way.


lol, funny one. 

But seriously, that's not second guessing at all and it IS about removing emotions. Are you saying it's second guessing while you're making the rule set to follow? Obviously its not but you certainly would avoid changing the rules after you've implemented it.


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## GoldStone (Mar 6, 2011)

First you said: "You do have to buy into the model". Then you said: "maybe hedge a little by leaving half in". That doesn't sound like a full buy-in. 

Nitpicking aside, it's fine to make your own set of rules. As far as I can tell, your proposed change is equivalent to this:

Divide the portfolio in two halves.
One half: follow Buy & Hold
The other half: follow timing model.

Right?


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## cainvest (May 1, 2013)

GoldStone said:


> Divide the portfolio in two halves.
> One half: follow Buy & Hold
> The other half: follow timing model.
> 
> Right?


Yup, that's one plan.

Just to clear things up, and hopefully avoid for future nitpicking  ... I'm just working things out right now (thinking out loud if you will) and have not adopted anything yet, totally in research mode. Since I've been away from the market for awhile, I really need to see what has changed and hopefully learn something valuable that I can apply. Among other things, those last corrections are high on my hit list so if I can put "something" in place that I think will reduce my losses, I will.


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## warrdogg (Feb 8, 2013)

My Own Advisor said:


> Taking charge of my investments was the best thing I ever did.
> 
> Looking back at my 20s, I wish I was DIY back then. Such is life. Live and learn and make mistakes and learn some more.


Thank you for posting this. I needed to hear this, so I can take the steps to DIY investing.


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## cainvest (May 1, 2013)

Tried augmenting the rule set today for better correction protection without much luck, always gets too complicated which is not good. I'm mainly focusing on getting rid of or minimizing false detections, probably need to have a new approach.


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## OptsyEagle (Nov 29, 2009)

cainvest said:


> Tried augmenting the rule set today for better correction protection without much luck, always gets too complicated which is not good. I'm mainly focusing on getting rid of or minimizing false detections, probably need to have a new approach.


Cainvest, you are aware that the S&P500 hit a RECORD high today. All an investor had to do to be the richest they have ever been, was to buy the S&P500 ... and not sell it. The risk is in the selling ... not the buying and not the holding.

I am absolutely positive, from the questions you are asking, in the fact that you are going to either lose a fair bit of money or miss out on making a fair bit of money, before you are hit in the face with the reality of my first paragraph.

You cannot beat this game. There is literally billions and billions of dollars, and millions and millions of extremely smart people, spending hours and hours and hours of time, trying to do it ... and failing. Do you really think you are going to come up with something that works better then buying the S&P500 ... and holding it? Good luck with that.


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## GoldStone (Mar 6, 2011)

OptsyEagle,

My portfolio compounded at *8%* annual rate from 1998 to the start of 2008. The compounding rate dropped to *0%* by the end of 2008.

2008 wiped out 10 years worth of compounding. Balanced asset allocation didn't protect me.

Yes, my portfolio has recovered nicely in the last 5 years. But... my compounding rate since portfolio inception is still far cry from 8%.

Take a look at Faber's paper that I linked upthread. The timing model is very simple. The goal is to avoid severe drawdowns (more than 20%) that destroy long-term compounding. Run of the mill corrections (less than 20%) are not an issue.


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## cainvest (May 1, 2013)

There is obvious risk in just holding, loss of investment gains over periods of correction. As already stated, check out the paper and tell me how much richer you'd be if you used that on the S&P500 over the years. Is it going to work for sure, who knows, but the premise seems sound. And yes, I'm currently enjoying the S&P500 gains.


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## OptsyEagle (Nov 29, 2009)

cainvest said:


> check out the paper and tell me how much richer you'd be if you used that on the S&P500 over the years. Is it going to work for sure, who knows, but the premise seems sound. And yes, I'm currently enjoying the S&P500 gains.


Hey, I am not arguing about how much money one could have made in the past, by doing this or that. If we started a thread like that we would all be here for a long time. My point is that history has also proven that they never work all the time, many are nothing more then a historical coincidence rarely to be repeated and most important ... human emotions will almost certainly have you abandoning the system for another one, just before it works.

Again, my point, do you really think that Goldman Sacks, Fidelity, Blackrock or any of the other numerous hedge funds have never seen that paper. If they have and they use it, it will destroy it's benefit in the future and if they don't use it, one has to wonder why.

Anyways, in about 10 years, maybe more, after you guys switch from one failed market timing system to another, you will probably get the point. Or who knows ...maybe you will get lucky.


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## cainvest (May 1, 2013)

Hedge funds operate in a different matter, can't put them all in one group and say they'll fail. Also, this model doesn't work all the time, it does have a failure rate BUT the wins are better than the loses which is the important part. Right now I'm trying to find a happy middle ground, one that reduces the bad trades but gives up a little up side reinvestment percentage, in other words, favors major corrections over minor ones.

As far as switching systems, I mentioned earlier that you have to stick to your method and if you think for one minute that you can't, DON'T DO THIS! If you are the type of person that emotions influence your investing then be a good couch potato or get an good adviser. I do understand your pessimistic concerns here but, believe in it or not, the math does show better results over decades of trading. I'll be adjusting my portfolio shortly so I'll keep this in method in mind to minimize in/out fees.

BTW, there was an excellent PBS Nova program on hedge funds done about a decade ago.


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## mrPPincer (Nov 21, 2011)

Dumb question, what is the meaning of the red and gray colours of the volume bars on those charts?


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## GoldStone (Mar 6, 2011)

mrPPincer said:


> Dumb question, what is the meaning of the red and gray colours of the volume bars on those charts?


I often wondered myself. I don't know. I don't think they are material to the model.


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## cainvest (May 1, 2013)

Here is the direct trading activity by my timing model on the 1980-2013 S&P500 data,
Date, percentage loss/gain, time out of market

1981-1982, -.81%, 9.75 months
1984, -5.8%, 5.25 months
1988, -5.7%, 6.00 months
1990-1991, -17%, 4.75 months
2001-2003, +29.4%, 29 months
2008-2009 +23%, 18 months

Still working on the model so I haven't included trading costs, out of market gains or actual yearly returns yet.


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## GoldStone (Mar 6, 2011)

cainvest said:


> Here is the direct trading activity by my timing model


Is it your model or Faber's model?


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## jcgd (Oct 30, 2011)

cainvest said:


> Here is the direct trading activity by my timing model on the 1980-2013 S&P500 data,
> Date, percentage loss/gain, time out of market
> 
> 1981-1982, -.81%, 9.75 months
> ...


Lets see the returns you get on your model tailored to fit the future market.


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## cainvest (May 1, 2013)

GoldStone said:


> Is it your model or Faber's model?


This was using my model, still based on a 300 day SMA just has a few extra rules applied.


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## cainvest (May 1, 2013)

jcgd said:


> Lets see the returns you get on your model tailored to fit the future market.


The unfortunate truth is the only way to find out how it handles the future is to see how well this model does starting now.
So far, for today, its perfect!


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## GoldStone (Mar 6, 2011)

jcgd said:


> Lets see the returns


The timing model is not about returns. It's about capital preservation. Eyeball this picture:










How old are you, jcgd? Late 20s? Early 30s? You have time on your side. You can afford to go down 50% and wait for recovery. Those of us close enough to retirement have a very different perspective. Capital preservation is paramount. I don't need 10% returns to retire early. 5% gets me there. The trick is to avoid the next market melt-down, if and when it hits.


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## cainvest (May 1, 2013)

Actually I would say the Faber timing model has better success for those with time on their side. With the updated info from the paper the buy/hold vs timing returns were 9.77 and 11.27 respectively for 1973-2008. The paper was done before the 2008 correction but was updated afterwards. Those of us with less time to retirement still might suffer if more unfavorable vs favorable corrections in the market occur in the time remaining. Of course you don't have to remove all of your investments on the day you retire so that helps extend the timeline if needed.


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## OptsyEagle (Nov 29, 2009)

Cain, let me recap your work. Correct me if I am wrong. You started off using the 300 SMA. Then when you observed that you had a few false signals and a couple of annoying trading swings, you went on to refine it. You tweaked this, you tweaked that and found a few indicators that magically avoided some of the negative stuff in your historical pattern.

The academics call this "datamining". It is the action of taking our superfast computers. Our over-abundant access to data and our human wish to be richer then Bill Gates and smarter then Einstein, and tweaking things until they appear to lead us to that goal. What the academics (and Fidelity, Goldman Sachs and most hedge funds) found out long before you were born, is that you can find these historical relationships in abundance, with everything. Just start overlaying your S&P 500 chart with ... the days it rained in New York, the years the moon saw a solar eclipse, the times the soldier ants in the Republic of Congo migrated east instead of west, etc. and you will start to see what they saw. That if you spend enough time at a computer, you will eventually get what you want. What they also saw, is that it not only has very little bearing on the future, but worse, since it will inevitably have false signals, human nature will have you changing it for something else, long before it may actually work. Your computer didn't die after you came up with your model and your wish for safety and prosperity most likely didn't die either. You will keep tweaking this broken model until maybe 10 years from now you realize, there is no easy path to success.

If anyone has any ability to succeed in this, I would put my bet on Goldstone, since he has already removed one problem from the equation. He is not trying to improve his returns, just provide him with some safety. Because of this, his experience will have a significantly higher probability of success then most others.

Anyway, I say this for the others looking upon your work. Most that go down this road will need to learn it for themselves, so good luck with it. If you do attempt a mechanical strategy, my best advice, keep it simple. The less tweaks, no matter what they appear to have improved in the past, will provide much better results in the future.

All this is just my opinion.


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## cainvest (May 1, 2013)

Optsy, my current rule set is simple and general in application, if that makes sense to you. By trying to minimize the impact of market downturns you are seeking to improve returns, just in a specific way so I don't see where you are going with that. I'd be very happy with a model that provided no direct in/out gains and just preserved the investment during a drawback while also reducing the odds be being whipped out for a loss at other times. While that really is the primary goal, the reality appears to be that some gains would be required to offset the induced losses of the model.

I agree, anyone looking at this does need to learn and understand it for themselves. There is potential for loss as well as gains by following a model like this and no one can predict the market swings of the future. Whatever model I come up with and however I choose to apply it (if I do at all) is strictly meant as one part of a risk reduction system.


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