Several readers emailed comments regarding last Saturday’s post covering ETFFX. Here’s what Glenn had to say:
It looks like they are using something similar to a 60 day SMA of SPY to make decisions. Sometimes they apparently are not 100% ‘in’ though, resulting in underperformance in an up market. And looks like they occasionally use some other criteria, or don’t follow the plan and underperform too, e.g., early November-mid-December 09.
Still, they more or less equaled SPY performance from 10/06 (apparently before it was available for purchase) to end of 07, out-performed by a large margin during the downturn, and then under-performed during the bull starting in March 09.
Thanks for passing this along. It may be a worth a try for some passive investing.
While I don’t know what methodology they use, it’s important to note that they did avoid the brunt of the 2008 crash, which is what really matters. Here’s the chart again comparing ETFFX vs. the S&P; 500 vs. the total bond market index:
Let’s assume for a moment that ETFFX is somewhat representative of what trend tracking is all about. It will smooth out the investment ride for you by limiting (not avoiding) losses by being on the sidelines when bear markets strike. Because it is a defensive way of investing, you will lag during bullish periods because of the effect of sell stops during pullbacks and the incremental move back into the markets.
If you are looking for outperformance during bullish periods, you will very likely not see it. Given that, how do you then outperform the S&P; 500? Very simple; only by combining the returns during bullish AND bearish phases in the market will you come out ahead.
Here’s an interesting anecdote. A reader called me at the end of 2009 and shared with me the following story: He had been with an advisor who grew this portfolio at a rate of 35% per year for 3 years straight.
Upon my inquiry as to why he was calling me, since I don’t generate those kinds of returns, he hesitantly replied “well, in the fourth year, I lost 80%.”
If you put a calculator to these numbers, you will conclude that, despite 3 years of incredible returns, he ended up losing half of his original investment. Now he has to make 100% on the balance just to get back to a breakeven point.
The moral of the story is that profits are meaningless, unless you have a way to protect them when sentiment changes from bullish to bearish.