Hello CJAM,
Thank you for this interesting idea. I tested the following:
-DJI from jan 31 through today
-stop loss at .95
-invest every month at the close of the previous month
-every investment runs for a year, unless stopped out
-no interest, no dividends
-no rebalancing
From the 852 periods, 394 got stopped out for -5%, 458 ran for an average 18.96%, and the total average was a gain of 7.88%. The average return for a 12 month run without stops was 8.08%. That a stop loss method comes this close to the 'normal' return is amazing indeed. BTW, with the stop loss at -10%, the average return gets to 8% (240 periods stopped out) and with the stop loss at -25%, the return actually beats the normal return, at 8.24% (42 periods stopped out). Of course, starting in 1931 gives your method rather a head start. Starting two years later brings the avg. annual gain/period at 8.06% (5% stop loss) vs. 8.92%. Still not a bad result at all.
Could you show the difference in volatility between your method and plain B&H, and what this does to the 'return gap'? With percentages this close, your method might even beat B&H.
Thank you for your efforts so far,
Karel