A principle reason why I use 12 overlapping year long stop-loss positions instead of yearly positions can be seen if you run yearly backtests against the Dow (1929 to 2009) as shown below - the result is too many 'dry' years.
By starting a new stop-loss position, once each month, each with a stop-loss set at 5% and a time-stop set to 12 months and using 1/12th of the 'cash' reserves available at the time is that you don't encounter as many 'dry' years when using monthly positions. You're better time diversified and more likely to have bought into at least one month at or near that years lows.
In concept if dividends = cash = 5% then each such position will at worse end the year with the same amount as at the start of the year as dividends and/or cash interest replenishes the 5% stop loss.
If you assume cash/dividends at a constant 5% rate then the Dow's total annualised rises to 9.7% versus 8.9% for the stop-loss style. Yet over any one runs 12 month start to end date the worse decline is near break-even. So its a form of cash like risk (low downs) with reasonable investment reward that aids in minimising cash-drag.
More recently I've been evaluating extending the defensive part by blending in a Permanent Portfolio element. So far that looks to be a reasonable low-down, better than cash reward type alternative/addition. Presently therefore I intend to build up a PP position over time to around 50/50 levels of average 'cash' reserves (half of cash reserves in PP and half in the stop-loss style).
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