PORTFOLIO SELECTION AND MANAGEMENT USING RISK/REWARD RATIOS

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Kevin_in_GA 4,599 posts msg #91438 - Ignore Kevin_in_GA	4/20/2010 2:49:45 PM I am in progress doing it right now. Because you are constantly rotating out the top stocks, this has to be done manually and is suprisingly time-consuming. I have run this back six months against a slightly modified ETF list (I eliminated a few like IVV and RSP that are 100% correlated with SPY, and added in some bond ETFs and three inverse ETFs (SH,DOG,PSQ) to provide for a more diversified pool of candidates). From 10/15/09 through 1/15/10 this approach is up 4.5% versus 3.5% for the SPY, even after trading commissions are included at $20 per trade. I still need to factor in the January correction and subsequent run up, so the test is not ready to post just yet. I have assumed a starting portfolio of $100,000 and no compounding of profits into the next trade. Like any strategy, not all of the selected ETFs will trade well using this approach - I will most likely further pare down the list once the backtest is complete by eliminating ones that never traded at a profit or only had a single trade over the last six months. I will not redo the optimization just to get a higher result, but rather I'll do this to get a better pool of candidates moving forward. Thanks also for the interest in this - I was starting to wonder if I was the only one interested in this type of portfolio management.
hmsb4494 81 posts msg #91876 - Ignore hmsb4494	4/30/2010 10:33:50 PM Kevin_in_GA - Ignore Kevin_in_GA 4/20/2010 2:49:45 PM I am in progress doing it right now. Because you are constantly rotating out the top stocks, this has to be done manually and is suprisingly time-consuming. I have run this back six months against a slightly modified ETF list (I eliminated a few like IVV and RSP that are 100% correlated with SPY, and added in some bond ETFs and three inverse ETFs (SH,DOG,PSQ) to provide for a more diversified pool of candidates). From 10/15/09 through 1/15/10 this approach is up 4.5% versus 3.5% for the SPY, even after trading commissions are included at $20 per trade. I still need to factor in the January correction and subsequent run up, so the test is not ready to post just yet. I have assumed a starting portfolio of $100,000 and no compounding of profits into the next trade. Like any strategy, not all of the selected ETFs will trade well using this approach - I will most likely further pare down the list once the backtest is complete by eliminating ones that never traded at a profit or only had a single trade over the last six months. I will not redo the optimization just to get a higher result, but rather I'll do this to get a better pool of candidates moving forward. Thanks also for the interest in this - I was starting to wonder if I was the only one interested in this type of portfolio management. hey Kevin---how did this come out???
Kevin_in_GA 4,599 posts msg #91900 - Ignore Kevin_in_GA	5/1/2010 12:46:34 PM I had put this aside to refine the filter, and in discussions with the guys over at etfreplay.com on this idea, learned that they were developing the same tool. Their approach is a variation on what I have posted here - they rank each ETF based on their relative strength over two different time periods (usually 20 days and 3 months), then weight the results to generate a performance metric. They also rank against volatility and add this in (the lower the volatiliy for the same return, the higher that ETF will be ranked). You can set the timeframes and relative weights for each of these three inputs, and backtest a limited set of ETFs from 2003 (or their creation date) through to today. Their strategy is also simpler - only keep the top-ranked ETF, and hold it for either a week, month or full quarter (not the daily rebalancing of 5-10 ETFs I was looking at). What I like here is that they have done what I was trying to do, but made it simpler, faster, capable of longer backtesting, and gives you an equity curve to evaluate performance rather than just a % profitable result. They only look at three ETFs, and rebalance monthly. One is always set to cash (SHY as the proxy). You can set the others, as well as the relative weighting of time periods and volatility. Remember - this is one trade per MONTH. Their default settings since 2003 generate the following results: Total Trades: 43 Total Days: 1849 ETFs Used: EEM (in 36.5% of the time) , SPY (in22.3% of the time), SHY (in 41.2% of the time) Return since 2003: 252.6% Average Volatility: 17.3% SPY return since 2003: 54.9% SPY Average Volatility: 21.4% Almost 5 times the return of buy and hold, at a lower average volatilty! I ran several variations using IWM instead of SPY (since smallcaps typically outperform the overall market). Using a 50%/30%/20% weighting, which more heavily emphasizes performance over volatility, the following results were obtained: Total Trades: 34 Total Days: 1849 ETFs Used: EEM (in 40.8% of the time) , SPY (in 22.7% of the time), SHY (in 36.4% of the time) Return since 2003: 416.5% Average Volatility: 18.9% SPY return since 2003: 54.9% SPY Average Volatility: 21.4% This combo outperfomed the SPY by 7.6x at a lower overall volatility since 2003. Now, if you ignore the volatility input completely, and just use a 50/50 weighting on relative strength, you get the following results: Total Trades: 35 Total Days1849 ETFs Used: EEM (in 46.5% of the time) , SPY (in 23.9% of the time), SHY (in 29.6% of the time) Return since 2003: 491.3% Average Volatility: 20.5% SPY return since 2003: 54.9% SPY Average Volatility: 21.4% In other words, making 1 trade every other month on average, this approach outperformed the SPY by 8.95x at a lower volatility (although not that much lower). Now I think you can see why relative strength is such a useful metric - in fact writing a filter for this is trivial: Fetcher[ symlist(spy,eem,iwm,shy) set{alpha, relative strength(SPY,20) + relative strength(SPY,63)} add column alpha sort on column 5 descending ] Just buy whatever ETF is at the top of the list at the end of each month, and hold it until the end of the next month. If it is still at the top, do nothing. If it is not the top pick, sell it and buy the new top pick. Wash, rinse, repeat. ONE TRADE A MONTH. This is perfect for those managing a 401K, as these ETFs are typically represented as bond or stable income funds, international/emerging market funds, and smallcap funds. If you want to add in other classes, just expand the etf list to include them.
jnafach 74 posts msg #91928 - Ignore jnafach	5/2/2010 9:25:01 AM Hey kevin, I am not sure hoe you get them I did run on same sit and got differnt return on putting 50% on 20 days and 50% on 3mo, also the filter you put how did you set it is it same as 50/50
jnafach 74 posts msg #91929 - Ignore jnafach	5/2/2010 9:43:05 AM ALSO ON FILTER YOU WROTE THE RESULTS ON END OF MONTH DO NOT MATCH LIKE IN END OF DEC AND END OF OCT 2009
Kevin_in_GA 4,599 posts msg #91933 - Ignore Kevin_in_GA modified	5/2/2010 11:44:17 AM Hey kevin, I am not sure hoe you get them I did run on same sit and got differnt return on putting 50% on 20 days and 50% on 3mo, also the filter you put how did you set it is it same as 50/50 ++++++++++++ I just re-ran it with IWM, EEM, and SHY at 50% 3 month, 50% 20 day settings. Still get 491.3% return since 2003. Did you set the rebalance for "monthly" versus weekly or quarterly? That makes a big difference. As for how I set my filter to 50/50, all that means is that the two time frames are equally weighted. Therefore the simple addition of the two is the same as a 50/50 weighting when you are ranking one ETF against another.
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 618 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 618 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!

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