Foolproof Failsafe? 3
How to Sidestep Bear Markets Great and Small
Using Three of the Major Indexes in the World
Mostly USA ETFs Portfolio
Hypothetical--Weekly
7 years April 12, 2002--April 3, 2009
See Comments below
How to make the best use of this page. This is a picture of something doing what it's supposed to do: making above average money while reducing risk. And doing it easily. It takes the heartstopping roller coaster out of the index rides which dump you at seven-year losses anyway, at least for the time being. It is also boring for long stretches, testing our constant hunger for action.
The best use is to add some options to the action. Simply buy call options wtih at least six months left to expiration. You will eliminate the column in the table below labeled % drawdown. Your worst percent drawdown will be limited to the cost of the option. That figure will be identical for every level of leverage in the table. Further, the option will add leverage, on average at mutiples between 3 and 6 times the level of returns from the underlying security. It will restore or exceed the average annual return of the Mostly USA system.
Yet since it may be too boring for the average action addict, I recommend you use this page, if at all, as an adjunct to the full Mostly USA ETFs system, buying long and selling short as its signals provide, three or four times a year.
This extends, updates, and improves the earlier, original Foolproof Failsafe. Please review that article for details here.
The system above in the chart is ultrasimple. It consists of two steps. Step 1: pick the highest ranked of the three index ETFs. Step 2: note whether the market trend is up or down. Buy the top fund when the market trend is up. Sell the top fund and buy Treasury Bills when the market trend is down.
A previous rankings and trend table in the Mostly USA ETFs portfolio shows the data necessary for the two-step decision process.
The chart above shows system results vs. each index held continuously. The starting market value for each is 100%, The ending value of each as of April 3rd is the numeral at the end of curve, expressed in percent.
There is a major improvement in this update, which was lacking before. The long-term trend timer from the Worldwide ETFs portfoio has been imported here and is pictured above as a toggle switch, either on or off, trend up or down. The signal threshold is 50, the middle level beteen the two extremes. Both it and the short-term indicator have to be at top extremes to buy. Either one at its lower level says, Sell, and stay out.
This double safeguard has reduced risk further. The base maximum drawdown becomes limited to -10% vs -17% in both earlier versions of this system.
TABLE OF RESULTS
Relation of Leverage to Profits & Drawdowns
|
profit |
compound |
% |
|
|
levg |
%/yr |
tot%profit |
drawdn |
CF |
|
1 |
8.2 |
70 |
-10.3 |
7 |
|
2 |
14.3 |
147 |
-20.3 |
7 |
|
3 |
20.1 |
246 |
-29.4 |
8 |
|
4 |
25.6 |
367 |
-37.7 |
10 |
|
5 |
30.6 |
508 |
-45.2 |
11 |
|
6 |
35.0 |
663 |
-51.9 |
13 |
|
7 |
38.9 |
823 |
-58.0 |
14 |
|
8 |
42.0 |
973 |
-63.5 |
15 |
|
9 |
44.3 |
1097 |
-68.4 |
16 |
|
10 |
45.7 |
1177 |
-72.7 |
16 |
|
11 |
46.0 |
1196 |
-76.6 |
16 |
|
12 |
45.1 |
1143 |
-80.0 |
14 |
|
13 |
42.8 |
1014 |
-83.0 |
12 |
|
14 |
38.7 |
812 |
-85.7 |
9 |
|
15 |
32.0 |
555 |
-88.0 |
6 |
|
16 |
21.2 |
267 |
-90.0 |
3 |
|
17 |
-3.4 |
-21 |
-91.8 |
0 |
|
|
|
|
|
|
SPY |
-3.9 |
-24.4 |
-55.9 |
<0 |
|
QQQQ |
-0.5 |
-3.5 |
-51.7 |
<0 |
|
DIA |
-3.4 |
-21.4 |
-52.9 |
<0 |
(CF is the 'Copernicus Factor', a ratio of
total%profit
to worst%drawdn.)
To be added here shortly: notes on the use of options to throw the drawdown column out the window and how to best use this page. Please check back tomorrow afternoon.
Read the previous Foolproof Failsafe articles here and here.
Posted
4/12/2009 7:30 p.m. EDT
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