-70%? Now that’s what I call a drawdown
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Picks from the Value Investing Congress West
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I wonder how a tactical system using the timing model would perform on just high vol asset classes? Maybe the following?
Nasdaq (QQQQ)
Microcaps (PZI)
Foreign Emerging (EEM)
Foreign Small Cap (GWX)
Junk bonds (HYG)
Emerging Bonds (ESD)
REITS (VNQ)
Foreign REITS (RWX)
Commodities (DBC)
Commodities (GSG)
Any other high risk ETFs that could be used?
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Forbes bungling of their aggregator opportunity is getting worse. From an email I received yesterday:
Please assist us in building the relationship with OptionsXpress and others. We are asking you to place an OptionsXpress widget (no revenue – it’s a small widget, I promise) on your site (above the fold). By placing this widget on your site, you will provide OptionsXpress with additional exposure, branding and awareness. This additional exposure will add to our solid click through rate performance and to increased sales / conversions for OptionsXpress. Increased conversions will lead to renewals at higher revenue commitments.
I just want to be clear that this is entirely voluntary and there is no requirement you need to do this– there is no commitment from us to OptionsXpress regarding the widget…however our experience shows us this may indeed boost future revenue levels from this advertiser
So, not only do you take most of the revenue from the blog, then you run ads for the Forbes site for 3 months, then you ask the blogger to run free widgets? What?
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“Any other high risk ETFs that could be used?”
DBA, GLD?
Well, most of the leveraged ETF’s would qualify as high risk but I don’t think they would work for what you are trying to do.
My pick would be narrow sector ETF’s like Biotech or Nanotech for high risk asset classes.
Also, if you run a simple backtest of your AA portfolio (not timing)(20% S&P 500, 20% EAFE, 20% GSCI, 20% Long US Bonds, 20% REIT) and swap microcap and emerging markets for the two equity slices, your CAGR goes up from 11.48 to 13.99 with Sharpe increasing from 0.62 to 0.73 (data from 1972-2007, rebalanced annually).
Matt – where did you get the data for emerging back to 1972?
I assume the microcap is from French Fama?
Not really enough history on those ETFs to get a great feel for how it would perform. Based on those, I get an annual return of 2.90% (risk-adjusted return of 20.94%) with 13.85% exposure. The problem is that only the QQQQ has substantial history. All the other trades – and the system has a 57.58% winning rate, but we need more data.
What about emerging market bonds?
Microcap is CRSP Decile 10 from 1972-1997 and BRSIX from 1998 to present.
Emerging Markets is VEIEX from 1995-2006, MSCI Emerging Markets Index 1988-1994, and from 1972-1987 from IFA’s Emerging Value Index with 0.9% annual fees added back in(reconstructed from data found here: http://www.ifa.com/portfolios/PortReturnCalc/index.aspx?i=EV&s=1/1/1972&e=12/1/1987&type=indices&g=1&infl=False&tax=False&wort=0&perc=False&wortinf=False&aorw=1#calc)
I have a spreadsheet with all of this data back to 1972 that I got from somebody on the Diehards website if you want it.
Yes; I tested a trend following method that I use and it looks quite promising. But I have the same concern – how can we simulate earlier data?
You may consider using ILF instead of EEM -it has very high correlation with EEM but is a lot more volatile.
I tried a study of using 30 year, 10 year, 5 year and so on maturities instead of just the 10 year, but the 10 year has the best risk/return characteristics. However, corporate bonds should be included. They have strong returns relative to risk and not too high a correlation with treasuries or domestics.
I also looked into Emergings vs. World since 1971. I used TRWLDM and TRWLDXM from GFD. The Emerging portfolio historically outperforms the World x/US portfolio and the timing returns look very strong. One thing I noticed is that the returns increase almost monotonically as you decrease the length of the SMA (does not normally happen with other asset classes), suggesting that you wouldn’t be curve-fitting by reducing the length down to 5 or 6 (.696 Sharpe vs. .51 on World @ 6% interest) months.
The ideal weight would be somewhere between 50% to 75% of the portfolios allocation to foreign stocks in emerging (6 month SMA instead of 10) and the remainder in the World index. Sharpe will be around .78 for that portfolio (16% return, 12.8% standard deviation).