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The bottom line from my experience infooverload is that within limits and subject to amounts traded it doesn't matter where you level trade points.
The limits are that if set to narrow then trading costs eat into the rewards from trading. Set too wide and the levels are never reached.
If you trade at say 1% moves you will have lots of trades, but trade very small amounts, as such trading costs might amount to more than the actual gains achieved.
If you trade at say 50% moves then you'll trade larger amounts and make larger gains per cycle, trading costs will be relatively small to the gains achieved, but you'll trade relatively infrequently.
There is a temptation to trade at 1 standard deviation amounts because graphs of the Bollinger bands (e.g. +/- 1 stdev) look like they are good at predicting, but in practice they are no different to trading at other deviations.
There are optimal bands that if traded produce the best results, however predicting those bands beforehand is as difficult as predicting future stock prices.
As such an investor who trades at say fixed 30% bands will likely compare to another investor who attempts to predict turning points etc. Accordingly trading the simplest approach is sufficient.
It's generally better to focus upon diversification and/or price appreciation potential rather than the technicalities of when to trade.
Many investments achieve comparable longer term rewards, of which bonds tend to be the most stable. Others such as commodities, stocks, REIT's etc. tend to track that reference over the longer term, but periodically encounter bubbles and subsequent bubble bursts. What most investors do however is invest after the bubble has inflated which means that they overpay for the stock. After the bubble bursts the declines can result in investment returns that underperform even cash, potentially over extended periods of time.
Much less frequently are assets truly cheap, but may be perceived as being so following a bubble burst event (when generally the asset has declined from over-priced to more fairly priced).
The best holdings in my opinion are a diverse range of stocks (domestic and foreign), bonds, gold, REIT, commodities and cash. When you hold such a collection in around equal capital value amounts and rebalance periodically whenever any one bubbles then you take profit out of the over-priced and distribute the proceeds across multiple others (in effect lock in the gain).
Such diversity also helps ensure that if you overpay for any one initially, then the subsequent decline in that one of many assets as its bubble bursts is much less than had that asset been held exclusively.
Rebalancing periodically is a must. If you hold through thick and thin then the profit take opportunities are missed. A reasonable choice of rebalance method is a mechanical one as that is more likely to be followed than if left to human emotion based trading.
Increasingly I have personally simplified my investment style having tried ever possible trading and/or prediction method I could think of. My preference now is to achieve market returns with low drawdowns and as such I'm attracted to Harry Browne's Permanent Portfolio ( http://crawlingroad.com/blog/ ) and Mebane Faber's Quantitative Asset Allocation methods ( http://www.mebanefaber.com/timing-model/ )
Rather than using one or the other alone, again I've looked to diversify and use a intermixed form of 50/50 blend of both PP and Mebane's.
But I've opted to use a bond ladder (spanning 6 years/steps) ( http://www.financialwebring.org/gummystuff/bonds-4.htm ) as an alternative to 30 year (PP) or 10 year (Mebane's) choice of Bond holdings as I believe bonds to be in a relative bubble (JMHO).
I've therefore moved away from AIM like band trading to monthly reviews 40% bands (i.e. 12.5% initial allocations and rebalance whenever any one component exceeds or declines +/- 5% above/below that (7.5% and 17.5% rebalance trigger points).
The Mebane method does additionally trade according to current price relative to its 10 month moving average (similar to 200 day moving average), by reviewing each month and being in when the current is above the moving average or otherwise out for that month if below. For my part I only trade the Foreign (BRIC), Commodities (DBC) and REIT (IPRP) in this manner.
If the next 30 years have as low drawdowns as that for the Mebane and PP figures previously shown that will likely see me out whilst providing investment comfort along the way.
Best. Clive.
PS another link you might be interested in is a UK PP http://www.fool.co.uk/news/investing/investing-strategy/2009/06/29/feeling-cautious-load-up-on-gold.aspx
One aspect of potentially using Permanent Portfolio that troubles me somewhat is that it might be a case of data mining.
Here is one of the most optimal 1972 to 2008 investment blends, comprised of Emerging Markets, Gold and LT Bonds
Perhaps that implies that in the forward time direction that relative out-performer of past might be tomorrows relative under-performer.
LT Bonds have been on a long term mean reversion following excessively low prices in the mid 1974, rising up to present day near 0% current base rate highs and as such may prove to be one of the poorer performers in the forward time as base rates start to rise again.
Gold price was de-fixed in 1971, leading to exceptional performance in the the 1970's.
Gold does serve as a domestic currency risk counter, but that can be easily achieved by holding non-domestic currency based stock investments. It's easier for US investors as when their currency slides the rest of us slide down with it, so in import/export terms (purchasing power) there's little change.
Stocks are an inflation hedge. Yes existing investors suffer as prices crash down to reflect forward time inflation pacing growth and higher yields, however if you've cash to buy stock at the lower price or took steps to protect against downside price slides, then stocks can still serve investors who owned stock prior to the declines.
Gold and LT Bonds seem a bit of a risky play, supposedly riskier stocks might be the safer approach, especially if we're about to enter (or are in) inflationary or sideways ranging market conditions and we're using AIM-like investment methods.
When many see a performance graph such as the first one shown above the reaction can be a temptation to buy into that in expectation of future performance matching the historic performance. More often that turns out to be a buy-high event. Better perhaps to look for relative under-performers, and buy into those instead. Accordingly I'm seriously thinking about ditching the concept of using PP as part of my defensive ('cash') set.
An alternative to Permanent Portfolio might be to use a 50/50 Stock/Bond blend that's 50/50 blended with PP. Overall that results in 37.5% each of stock and LT Bonds, and 12.5% in each of cash and gold.
Run stocks, bonds, gold and cash through the optimiser http://www.riskcog.com/portfolio.jsp#5b009ac5f82re and out pops
which is more aligned to a 50/50 S/B blend combined 50/50 with a PP
67% is leaning on the high risk button just a bit, whatcha think?
From the low cash reserves of 12% indicated back in March 09 (message 135) when the FT100 was at 3500 levels, to current indicated 67% cash against a FT100 of 5100 (nearly 46% up from that March low) - it's saying a bit too much - too quickly.
That is further highlighted by the RV's (as shown in iBox) PE component which at 17.6 (red bars in the chart) currently is a high relative to the 4 years of data shown in the RV graph. It would only take base rates to rise a bit to push the combined PE+BoE above the higher (white line) band into high risk territory (presently at 20.72)
If you consider the stock exposure side to be a martingale play e.g. add as share prices decline, reduce as share prices rise, whilst the 'cash' side is deployed in anti-martingale (let winners run, cut losers quickly, trend is your friend etc.), then the 67% in anti-martingale, 33% in martingale suggests a heavier bias towards continuing to run gains, but cutting losers quickly is more preferable to buying dips/pull-backs at the present time.
As the white lines re-converge again with the bottom value pulling upwards and maybe the top also extending upwards, as would occur during a Bull phase
so the risk profile would adjust to centralise indicated exposure/cash levels.
Another way to view it is the indicated stock exposure of 33% in aggressive (AIM stock part) and the 67% in defensive. If you kept 'cash' as cash then yes 67% is high. If you used for example Permanent Portfolio holdings as the defensive part then cash-drag is minimised. I personally use a stop-loss style for the defensive, within which all prior 12 runs (one started each month) up to March had been stopped out, but the ones running since March are doing well, but will cut out quickly should a turn around occur (I use stops set at 5% below the original purchase price).
To date, of the 7 stop-loss based runs (i.e. monthly positions) started since March 09 : March and June have been stopped out, April's is up 31%, May up 21%, July up 21%, August up 12% and Sept up 5%
Best. Clive.
