iQoncept
Starting Portfolio Strategy
The Adaptive Momentum Investing (AMI) was launched in July 2021. The strategy used in managing its portfolios is available in the launching article.
My investing strategy is composed of two steps: (1) Monitor the state of the markets and decide if the market is in risk-on or risk-off, and (2) Select the assets to invest in based on their momentum over an evaluation period.
Changes to the strategy
Initially the strategy has been binary, i.e. it had two market states: risk-on and risk-off. In February 2022 a third, risk-neutral has been added. The new three-state risk indicator is described in this article.
At the publication of the 3-state strategy, during the risk-neutral state, the funds were invested in a combination of “risky” and “safe” assets. In my simulations, I used 50% equities and 50% Treasury funds. That worked well in historical simulations from 2003 to 2021, but starting with the fourth quarter of 2021, the Treasuries started a long-term downtrend. For that reason, the risk-neutral state invests now in the so called “defensive sectors”, the staples, health care and utilities.
In April 2022, in this published article, it was shown that investing 100% in XLP during risk-neutral periods has performed well both in the past and during the current bear market.
Finally, in May 2022, a commodity fund, DBC, and a US Dollar, UUP, have been added to the risk-off asset list. See this article.
Strategies Simulations for the Non-leveraged ETFs Portfolio
When the markets are risk-on, the non-leveraged ETF portfolio, NLEV, invests in the top ETFs ranked by momentum over an evaluation period. The set of ETF choices is given in the following list.
[‘DIA’,’SPY’,’QQQ’,’XLE’,’XLF’,’XRT’]
When the markets are risk-off, NLEV invests all the funds in the top ETF from the following list.
[‘IEI’,’IEF’,’TLT’,’DBC’,’UUP’]
When the markets are risk-neutral, NLEV invests all the funds in the consumer staples fund, XLP.
To differentiate between the original strategy, and the new, modified strategy, I call the original “STRATEGY #1”, and the new strategy as “STRATEGY #2”.
Simulation Results
The two strategies were simulated over the time period starting on 9/1/2007 and ending on 11/30 /2022. The first table shows the summary performance of the two strategies and of a SPY buy-and-hold benchmark portfolio.
|
CAGR |
stdev |
maxDD |
Sharpe R |
Sortino R |
|
|
STRATEGY #1 |
22.66% |
17.46% |
-26.20% |
1.25 |
1.73 |
|
STRATEGY #2 |
26.66% |
17.48% |
-15.95% |
1.47 |
2.07 |
|
SPY B&H |
8.80% |
20.34% |
-55.17% |
0.38 |
0.47 |
The next table shows the annual returns of the NLEV portfolios and of the benchmark buy-and-hold SPY.
|
YEAR |
STRATEGY #1 |
STRATEGY #2 |
SPY B&H |
|
2007 |
13.17% |
16.55% |
1.64% |
|
2008 |
19.60% |
27.72% |
-39.23% |
|
2009 |
42.40% |
40.94% |
29.46% |
|
2010 |
29.24% |
32.31% |
15.03% |
|
2011 |
12.28% |
17.82% |
1.87% |
|
2012 |
4.89% |
7.98% |
12.14% |
|
2013 |
23.58% |
18.46% |
31.60% |
|
2014 |
17.77% |
13.07% |
15.24% |
|
2015 |
6.92% |
11.28% |
1.26% |
|
2016 |
24.15% |
7.46% |
11.99% |
|
2017 |
19.55% |
22.14% |
21.24% |
|
2018 |
9.18% |
12.21% |
-5.27% |
|
2019 |
21.99% |
24.03% |
32.78% |
|
2020 |
79.63% |
79.63% |
17.85% |
|
2021 |
39.52% |
54.81% |
30.07% |
|
2022 |
-5.79% |
34.48% |
-13.24% |
Comparison with Live Trading
The simulations show that the new strategy has been performing better than the original strategy in 11 out of 15 years. It also did a lot better recently in 2021 – 2022.
Because the changes to the strategies have been made in the first half of 2022, the performance achieved with applying the strategy since the launching of the service has not been as good as that of the simulations. To see that effect, the following table shows the returns for the simulations and the live portfolio since July 21, 2021 to November 30, 2022.
|
RETURN |
|
|
STRATEGY #1 |
-5.40% |
|
STRATEGY #2 |
47.87% |
|
LIVE TRADING |
8.07% |
|
SPY B&H |
-5.42% |
Conclusion
The original investing strategy (STRATEGY #1) applied without any modification would have performed about the same as the benchmark, buy-and-hold of the S&P 500, via its SPY ETF.
The modified investing strategy (STRATEGY #2) would have achieved a much better performance if applied since the launching of the service.
The live application of the evolving strategy performed better than the benchmark, but it missed a substantial amount of the improvement obtainable with the better strategy.
Currently, the market indicator is risk-on. The non-leveraged portfolio is invested equally in the following funds: DIA, XLE, XLF, XRT.
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