Agreed, but these financial events you are speaking of are so rare that it is very hard to time them with any degree of accuracy.
It depends on your goals. But if you are just looking for stock market rates of return with much less risk it isn’t that hard to design a system that will achieve that. Achieving something a lot better than that is very difficult in my opinion, without leverage.
Here is a link to a backtest on Portfolio Visualizer of an example of a very crude system that would have kept you out of trouble. 4 basic asset classes (S&P 500, long term treasuries, gold and cash). System rotates into the top 2 assets each month based on the 3 month previous rate of change. Since 2006, would have beaten the S&P 500 with 1/3 the maximum drawdown.
This is a very simple example but one that anyone can use. In practice, I would design it with a number of filters and more asset classes to improve results, but they wouldn’t improve that much. They would mainly lower the risk a little more and smooth out the returns.
As I mentioned in this thread, the hardest part of these systems is sticking with them and avoiding FOMO, not the actual design.
I strongly agree with you.
You may already know this but if you change the tickers on PortfolioVisualizer to this you get basically the same backtest but much more history.
Thanks! I did not know that. Results still look great vs buy and hold SPX. Who could have ignored the FOMO and stuck with this between 95-00 and 09-18?
That is such an important question! That’s probably my main concern behind my original question and the backtest I showed.
How does one tell if a drawdown indicates a strategy doesn’t work anymore or is just another period where FOMO must be ignored?
Personally I feel that drawdowns are not great ways to determine if a strategy is broken. I think you have to look at the robustness of the logic, reasoning,etc.
My point was even if the strategy performed as expected, people would not be able to stick with it because of FOMO. TAA strategies, by design, underperform during bull markets. They are not broken during this period, yet people will quit them anyway to join the party.
With respect to your question, you would need to know why the drawdown occurred before dismissing the strategy.