PORTFOLIO SELECTION AND MANAGEMENT USING RISK/REWARD RATIOS

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Kevin_in_GA 4,599 posts msg #91935 - Ignore Kevin_in_GA	5/2/2010 12:35:51 PM ALSO ON FILTER YOU WROTE THE RESULTS ON END OF MONTH DO NOT MATCH LIKE IN END OF DEC AND END OF OCT 2009 +++++++++++ Their calculations might be determining relative strength in a slightly different way than SF does it. Here I am using the relative strength(SPY,XXX) function to measure the extra return each ETF might have had over the SPY for the last XXX days. Besides, the substitution of IWM (my filter selection for the end of Dec 2009) versus EEM (their selection) resulted in better portfolio performance for the following month. I'm sure that since 2003 there are multiple differences in the monthly selection, but my guess is that both approaches dramatically outperformed SPY with lower volatility. The basic premise here is that one can use relative strength with a select set of ETFs and outperform the market with lower volatility and only one trade per month. I would love to see other filters or trading systems that can deliver similar performance since 2003, regardless of trade frequency.
glgene 616 posts msg #91943 - Ignore glgene	5/2/2010 6:14:11 PM Kevin, Excellent post! Thank you, thank you. I, too, enjoy ETFs as a lower volatility way of investing. $64,000 question: How did your system do in 2008?
Kevin_in_GA 4,599 posts msg #91949 - Ignore Kevin_in_GA	5/2/2010 9:00:35 PM Here is the backtesting of my filter from January 1st, 2007 until this past Friday (assuming compounding through re-investment at the end of each month): month etf % return capital 1/7 EEM 0.11% $100,110.00 2/7 EEM -3.23% $96,876.45 3/7 SHY 0.45% $97,312.39 4/7 EEM 3.73% $100,942.14 5/7 EEM 5.06% $106,049.82 6/7 EEM 3.68% $109,952.45 7/7 EEM 0.71% $110,733.11 8/7 EEM 1.04% $111,884.74 9/7 EEM 11.57% $124,829.80 10/7 EEM 11.87% $139,647.10 11/7 EEM -7.65% $128,964.09 12/7 EEM -1.4% $127,158.60 1/8 SHY 1.65% $129,256.71 2/8 SHY 1.03% $130,588.06 3/8 SHY 0.25% $130,914.53 4/8 SHY -0.84% $129,814.85 5/8 EEM 3.16% $133,916.99 6/8 IWM -7.53% $123,833.05 7/8 SHY 0.47% $124,415.06 8/8 IWM 3.57% $128,856.68 9/8 IWM -7.75% $118,870.29 10/8 SHY 1.10% $120,177.86 11/8 SHY 1.10% $121,499.82 12/8 SHY 0.56% $122,180.21 1/9 SHY -0.44% $121,642.62 2/9 SHY -0.15% $121,460.16 3/9 SHY 0.50% $122,067.46 4/9 EEM 15.56% $141,061.15 5/9 EEM 15.94% $163,546.30 6/9 EEM -2.25% $159,866.51 7/9 EEM 11.01% $177,467.81 8/9 EEM -1.31% $175,142.99 9/9 IWM 5.56% $184,880.93 10/9 EEM -3.44% $178,521.03 11/9 SHY 0.60% $179,592.16 12/9 EEM 3.27% $185,464.82 1/10 IWM -3.73% $178,546.98 2/10 IWM 4.48% $186,545.89 3/10 IWM 8.24% $201,917.27 4/10 IWM 5.67% $213,365.98 During this same time frame, the SPY went from $100,000 to $83,521.97, a loss of -16.47%, versus the 113.37% gain seen here. And from the market high in 11/07 through until the end of march 2009, this system only lost about 15%, which when compared to the SPY (a loss of 46.7% for the same time period) looks pretty good.
glgene 616 posts msg #91955 - Ignore glgene	5/2/2010 11:58:57 PM Kevin, Bravo, again for your study...and results. Using your figures and comparing it to VTI (Vanguard Total Stock Market [which I understand is NYSE + Naz]), I get these comparisons: ...................Your study.............................VTI [buy & hold] 2007 ......... +27.16% .......................... +3.52% 2008 ......... -3.92% .............................. -38.35% 2009 ......... +51.80% .......................... +25.99% 2010 ......... +15.04% .......................... +8.02% (4/30) Your study: $100,000 grows to $213,366 .............VTI: $100,000 shrinks to $86,856 ............ SPY: $100,000 shrinks to $83,897 ............ DIA: $100,000 shrinks to $88,495 Note 1: My VTI, SPY or DIA numbers do not include dividends reinvested. Do yours? Note 2: My numbers do not includes taxes or commissions. Do yours? Note 3: VTI, SPY and DIA numbers come from VectorVest software. Your study honors Warren Buffet's best advice: "The best way to make money is FIRST, don't lose money." Thus, your 2008 shines relative to millions of investors who lost $$$$$$$$$$$. How many wouldn't have gladly accepted a -3.92% loss in 2008?! Did your study include these three inverse ETFs: DOG, SH and PSQ. Or not? Again...many thanks for the sharing of your time and talent to show your study and results. You get the "gold star" for your diligent work. More gain, less risk. Ahhh!
Kevin_in_GA 4,599 posts msg #91970 - Ignore Kevin_in_GA	5/3/2010 9:47:05 AM Note 1: My VTI, SPY or DIA numbers do not include dividends reinvested. Do yours? Note 2: My numbers do not includes taxes or commissions. Do yours? Note 3: VTI, SPY and DIA numbers come from VectorVest software. Your study honors Warren Buffet's best advice: "The best way to make money is FIRST, don't lose money." Thus, your 2008 shines relative to millions of investors who lost $$$$$$$$$$$. How many wouldn't have gladly accepted a -3.92% loss in 2008?! Did your study include these three inverse ETFs: DOG, SH and PSQ. Or not? +++++++++++++++++++++++ 1. No. 2. No. 3. I did not include any inverse ETFs - just those shown in the symlist of the filter. Obviously you can add in any other symbols you want to to see how they would fare - the inverse ETFs would have done well during the big downturn, but would have lost you money in March 2009 and Feb 2010. You are welcome to add them in and retest to see if they help. I have been fooling around with the ideas of relative strength and risk-adjusted returns for the last month or so, prompted by the clever work at etfreplay.com. By the way, their 50/50 selections returned around $227,000 over the same time frame. I do not want people to think that volatility should be ignored just because the returns are higher - that is to be expected. What is more important is to be sure that you are aware of the current volatility and risk when placing the trade. This is why the Sharpe ratio is such a useful metric, and why my original filter focused on it rather than just relative return. The relative return filter I wrote here is a quick means to the same end, but in reality I would rather use one that looked at the sum of the Sharpe ratios, and let you see the relative volatility even if you do not use it in your calculation. You might see a lower overall return, but it will also come with lower volatility and drawdown.
cwn6161 40 posts msg #91971 - Ignore cwn6161	5/3/2010 9:49:49 AM Kevin - you've done a great job with this. I was considering using your modified TRO crock pot, but I was worried about trading the lower priced stocks and how easily they could move, depending on the amount one was trading. This filter really is great for people with 401ks or other longer-term investment portfolios. Well done!
guymar 113 posts msg #91984 - Ignore guymar modified	5/3/2010 12:00:16 PM Kevin, great post, could you just tell the ignorant like me how the relative strength is computed exactly? Is it comparative relative strength like in the SF user guide? It seems very difficult to find a unique formula for it ....?
Kevin_in_GA 4,599 posts msg #91986 - Ignore Kevin_in_GA	5/3/2010 2:08:15 PM Relative strength and comparative relative strength are the same. Fetcher[ symlist(spy,eem.iwm,shy) add column relative strength(SPY,20) add column comparative relative strength(SPY,20) ] As you can see from the filter above, only one column is generated.
sbuck143 88 posts msg #91987 - Ignore sbuck143 modified	5/3/2010 2:12:39 PM =thunderous applause for Kevin= Great job Kev! Now, to really blow ones mind, imagine buying a 6 month out call instead of the ETF each month.....
sbuck143 88 posts msg #91991 - Ignore sbuck143	5/3/2010 4:23:39 PM I am wondering what would be the best mixture of ETF's to use with this theory? ETFreplay is a great site, but I wish you could easily test more than just 2 at a time (with SHY being locked in as one of them). There's a very long way to go about it by comparing and combining different sets of data, but it seems like this would work best with maybe 5 detrended ETF's, and that gets to be exponentially more work to backtest.

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