Adapting to Change
When? Why? Where? How? Outcome
PROFIT CURVE, WORLDWIDE SYSTEM vs BENCHMARK INDEXES
Hypothetical Total Return--June 21, 2002-December 26, 2008
|
The key to handling change is adaptivity.
How do you know when to apply it? By looking. The original policy statement on system checkup and review was published December 15, 2004. It recommended six-month intervals. This was done last weekend. The results appear in the chart above.
The pale magenta curve is system results before the checkup. The solid red curve shows system results after correction for drift. The two curves profile where and to what extent the drift exhibits itself. Before correction, total gain was +33%/yr, 525% total gain. Worst drawdown improved from -37% to -30%.
Previous similar analysis has appeared in Systems Tips. See
the article, How the Number of Funds Held Affects the Final Outcome.
In the current case, no change is made in the system itself. A single application has been modified. Two bottom-ranked funds are sold short instead of the single bottom-ranked fund, which has been the practice since inception. The table below shows the empiric results of varying the number of funds sold short.
For example, in the table, if you sell short 2 bottom-ranked funds (btm n column) when the market is in a downtrend, your total portfolio gain (% tot gain) will be 704% which is 37.7% per year compounded (third column), giving to best gains of any number of funds held short (except for n=7, which is disregarded for practical use in small portfolios, and the incremental gains are not worth the extra trouble). The low drawdown of -30.3% (last column) for n=2 trumps the near disastrous -48.8%--so far--of the SP500.
June 2002-December 2008
|
%tot |
|
draw |
|
btm n |
gain |
%/yr |
down |
|
1 |
525 |
32.5 |
-34.0 |
|
2 |
704 |
37.7 |
-30.3 |
|
3 |
678 |
37.0 |
-30.8 |
|
4 |
656 |
36.4 |
-28.6 |
|
5 |
624 |
35.5 |
-29.1 |
|
6 |
674 |
36.9 |
-25.9 |
|
7 |
707 |
37.8 |
-26.2 |
|
8 |
682 |
37.1 |
-26.1 |
|
9 |
678 |
37.0 |
-24.7 |
|
10 |
661 |
36.6 |
-22.8 |
|
SP500 |
-11.8 |
-1.9 |
-48.8 |
What to do about drawdowns. Nothing. They have absolutely no mechanical effect on outcomes. An outcome is the amount of money you make at the end of a period of time. The outcome of the system is $704,000 on a $10,000 invesment over six-and-a-half years. The outcome invested in the SP500 is $8,820.
Drawdowns are a subset of volatility. Volatility is mistakenly called risk. True risk is real dollar loss. When subtracted from real dollar gains, the result is outcome. The real dollar losses associated with the system are a function of the trader using the system. He is she is beset by the psychological worrry of drawdowns because that is what they see and hear talked about.
Real returns for the system are posted here as they occur and are never restated except to correct error. Serial changes in system processes or applications have no effect on historical real returns.
These are substantial results. Especially with the SP500 losing money over the entire period, and the NASDAQ 100 dropping -46% since its recent peak.
How bumpy is the road to get there? The answer is essential. You may not want to take the trip if it is too jolting. The
next chart (to be updated shortly--will show peridioc drawdowns range btween 17 and 30%)
is the devilish counter-balance to this one.
Also, noting the laggard periods, this article may help you weather them when they occur again--as they will.
|
Table of One-year and Five-year Results
--3PORTF/24ETWORK/cellJ475>>BTM_n.htm
© 2009 The 2000 Corporation.
All Rights Reserved.
|
| |