And So The Journey Begins

I've been investing and casually trading for about 5 years now, always looking for a better, more profitable way to acquire wealth, with minimizing the risk as much as possible.

What worries me is what's been happening with the stock market ever since around the change of the millennium. As you can see from the picture below, for about 25 years before that buy-and-hold investing was relatively easy. However, had you bought in 2000 or 2008, you might have seen your portfolio decline over 55% in value. I don't know if I could personally stomach that kind of a move.

In a larger context, looking at the Dow Jones for about 100 years back, we also see that choppiness is pretty normal; meaning, if you're unlucky with the timing, you could potentially spend decades before seeing your account balance at break-even.

A traditional strategic allocation is usually based on holding a basket of diversified assets.
One of the best results for the last 12 years is if one had held SPY (S&P 500 ETF Trust) and TLT (iShares Barclays 20+ Yr Treas.Bond) in a 50%/50% allocation, rebalancing annually. As you can see from the screenshot below (backtested on etfreplay.com) the CAGR (compound annual growth rate) would've been +9.6% vs. just holding SPY +9.0% and the Max Drawdown -20.55% vs. just holding SPY -55.20%.

Since ETFs have a limited history, a similar backtest on portfoliovisualizer.com with correlated mutual funds FDVLX (Fidelity Value Fund) and VUSTX (Vanguard Long-Term Treasury Fund) allows us to go back to 1987. This showcases similar results, with the CAGR at +10.19% vs. just holding FDVLX +11.19% and Max Drawdown -27.44% vs. just holding FDVLX -62.24%.

Ok, so this is already much better than just holding the market, or counting on good luck with stock picking skills, or good timing with buying when the market is bottoming out and avoiding buying at market tops. However, I wonder if there was a way to (statistically speaking) increase returns without increasing the risk (Max DD) or even lowering it?

About 6 months ago I came across terminology new to me, which includes tactical asset allocation (TAA), flexible asset allocation (FAA), adaptive asset allocation (AAA) and rotation model strategies. Models based on these concepts generally require a somewhat more active investing approach vs. the traditional buy-and-hold strategic allocation method.

In the upcoming posts I'm going to showcase some of the (in my opinion) better models I've come across and open them up for discussion. Of course no backtest is going to guarantee future results, but the study of statistics is the study of probability.

As my first handout, for anyone who has access to the ThinkOrSwim (TOS) platform, here's an indicator I'm currently using that would've kept one out of the 2008 tumble, yet kept one in the market from May 2009 up to date: QH_AdvDecnCumulativeStudySTUDY

More TOS studies/strategies and Excel sheets to follow in subsequent posts.
If you're interested in learning more, please check out the "Sites I Follow" links on the right side of the page. These sites offer a wealth of information, and are the source of most of my knowledge and model strategies.