In my last post I was asked a great question…
“How does the rate of return of your active trading
approach compare to the rate of return of an unmanaged index like SPY with
dividends reinvested? How do the annualized rates of returns compare on a 1, 3,
5 and 10 year basis?”
This question has a simple answer but requires some
explanation… The S&P500 (Exchange Traded Fund to trade S&P500 with
ticker signal SPY) has way too much volatility for my stomach. SPY’s returns
can be very nice and beats most fund managers but I cannot accept a 30% loss
year after year during a major recession. It is possible that by just using SPY
and selling calls on SPY one could beat SPY. Or I could beat it by trading SPY
with technicals like my ICE trading system on SPY… but I also worry about what
happened during 911 and the likelihood of an overnight event where the markets
would open up with a 20-25% loss when I am heavily invested in SPY. Unlikely event
for sure; but the way I handle that eventuality is not fully investing in the
stock market. I keep my powder dry which also produces less returns. When ICE
turns negative on SPY (and it is negative – see chart below – blue bubble is an
EXIT sign against the previous Up signal) I pare down on my 401K drastically. See ICE system on SPY below.
Trading returns are a function of technicals, money
management tools and our own psyche. I believe I have excellent trading
systems. I am very cautious on money management which reduces returns as my
psyche is conservative. What people who want astronomical returns don’t realize
is that high returns typically require higher risk of loss… that means in
chasing a high return like 20-30% the account could see drops of 20-40% at some
time or other. Most people want the high return but would fire their fund
manager after a 15-20% drop…I prefer to use a system more like the Ivy
portfolio by Faber and Richardson using 5 sectors and tactical asset
allocation… this is known to yield about 10-11% returns on an annual basis with
loses of no more that 3-4% in any year over the last 25 years of back testing…That
suits me much better than the volatility of SPY. So in a year like last year,
it will fall well behind SPY’s returns. This has been frustrating for me – I
admit, even though I know the reasons.
I manage my 401K with
my current and last employer, and also a few R/IRA accounts that are with
brokerage firms. I use the Ivy portfolio system and options on my R/IRA accts.
My 401K system is a monthly momentum system riding the fastest movers but when
ICE says down on SPY, I am out of there…. and sitting on the sidelines in a
fund that returns 1%. ICE may generate a false signal but we cannot forget that
the market has been up 4-5 years now and is likely to see a significant drop at
some time …I do not want to be riding that down. In 2008 I was flat in a very
down year… and that will be again my goal next time around.
In order to spike my returns on my R/IRA acct, I have taken
about 16 stocks, developed very quick in and out trading systems and am
following it to generate higher returns. Stocks in this pool are diverse like
AES, CL, F, GD, HOG, HOV, HRS, KO, NAV, NUGT, PFE, RFMD, SU, SNDK, TAN and X.
Still not fully engaged in all these; just some as I am still not satisfied
with some… my expectation is higher returns with this but I expect this list to
narrow later this year. I am starting small with this for 2014 and sharing
“use” with the Ivy portfolio system in my R/IRA acct and typically only 30-60%
invested.
I believe the big money and returns are elsewhere and
not in the equity markets… and I have my eye on it. No – I do not trust the
Forex markets. But I am developing a very
active trading system on Nasdaq 100 e-mini futures… I am currently very active on my job which
involves advanced engineering management of innovation type projects. I have
limited time to developing this.. but it is always on my mind as I could easily
beat SPY returns making just an average of 6 pts a day on Nasdaq 100 e-minis…My
long tem goal is to trade this aggressively with only 10-15% of my account
while the rest remains in a safe state… more along the lines of what Taleb
would suggest… the key to that is finding a safe managed futures trader. I hope
that will be me one day.
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