If you’re new to FT Cloud, these 3 videos will help get you started. Check them out on our youtube channel: http://youtube.com/investorsfasttrack/
Strategy
Use Momentum to Improve Investment Returns
Introduction
Investors FastTrack and FastTrack strategies have been around for a long time and have a great track record. For 25 years we’ve been training money managers and wealthy individuals how to increase returns and reduce volatility with FastTrack products. This paper discuses a typical investors profile (derived from the years of speaking with investors), the pitfalls of the typical investor, and how to FT Cloud+ can improve the typical investor’s portfolio.
Every Investor’s Goal: Increase returns and reduce risk. FT Cloud+ uses high quality data, processing power or our server and your computer to crunch the numbers and make achieving this goal simple and fast.
A picture speaks a thousand words… Over the past 10 years a typical investor has experienced major drawdowns and lower returns than the S&P 500. FT Cloud+ has produced a fraction of the drawdowns and retained the upside of a good investing strategy. Read more below to dig into the FT Cloud+ details.
Green Line: FT Cloud+
Grey Line: S&P 500
Profile of a Typical Investor
FastTrack has been is a nexus of money mangers and wealthy individuals for the past 25 years. We’ve spoken to thousands of different investors and its safe to say the profile below is extremely accurate.
The red line in the chart above is the average investor’s portfolio. The red line is a 60/20/20 portfolio. That’s 60% S&P 500, 20% long investment grade bonds,and 20% cash, then rebalanced to those allocations at the beginning of every year. We can see it’s not a strong strategy. Its highly correlated to the S&P (99.3%), produced a 37.3% draw down, and weighs in at approximately 1.25 percent less annualized return a year compared to buying and holding the S&P.
Every week we speak to investors that hold this portfolio and claim “diversity,” but have a portfolio substantially similar to the red line above. What does it take to break out of this rut? Below we’ll look at a strategy with 4 trades a year and holding the best 4 fund of diversified family. FT Cloud+ does the heavy lifting, all you do is pull the trigger.
Improve With FT Cloud+
Be More Active To Improve Returns (But No Need to Be To Active)
As the “typical investor” analysis above shows, buy and hold isn’t a great strategy. With FT Cloud+, we’re going to make 4 trades a year, and each trade we’ll rank our family of tickers by total return and guy the top 4 tickers in the list. Its very straight forward. And, its called the “Momentum Model” because when funds are trending up, we buy them. When funds are trending down, we sell them.
The green line in the chart above is the FT Cloud+ Momentum Strategy. Its a simple strategy with 4 trades a year and always hold 4 fund at approximately 1/4 of total assets each. The power of the FT Cloud+ model is which 4 funds you hold. FT Cloud+ chooses the funds based on momentum and relative strength. Its not a black box or a fancy algorithm. Every quarter FT Cloud+ ranks a group of funds (in the green line we ranked by total return), sorts by value, and buys the top 4 funds.
More Details
Here’s how FT Cloud+ uses momentum:
- Step 1 – Choose a diversified list of funds you might possibly want to own. For this example we used 21 Vanguard mutual funds. The list of 21 (see entire list in appendix A) is a diversified mix of plain vanilla Vanguard funds. We’ve go equities, bonds, money market, international, and commodities.
- Step 2 – At the end of every quarter we rank the 21 funds by total return for the prior month. So, this give us a ranking of the trailing 1 month.
- Step 3 – Sell all positions in our portfolio. Sort our ranking with the highest total return at the top. Reinvest our assets evenly among the top 4 assets in our ranking.
Summary
It pays to be a more active investor and with FT Cloud+ doing all the hard work and heavy lifting, its a straight forward and painless process.
All our strategies are easy to understand and easy to execute. And best of all… they work. There’s no need to stick with strategies producing big drawdowns, high correlations, weak performance.
Visit http://www.investorsfasttrack.com today to sign up. Use promo code “MARCHFREE” to get your free trial of FT Cloud+.
Tickers in Family
- VUSTX – Vanguard INV:Long-Term US Treasury
- VWESX – Vanguard INV:Long-Term Investment Grade
- VMMXX – Vanguard INV:Money Market Prime
- VBMFX – Vanguard INV:Total Bond Market Index Fd
- VFIIX – Vanguard INV:GNMA
- VFSTX – Vanguard INV:Short-Term Investment Grade
- VWEHX – Vanguard INV:Hi-Yield Corporate
- VGHCX – Vanguard INV:Health Care
- VWINX – Vanguard INV:Wellesley Income
- VINEX – Vanguard INV:International Explorer
- VGENX – Vanguard INV:Energy
- VTRIX – Vanguard INV:International Value
- VEXPX – Vanguard INV:Explorer
- VWUSX – Vanguard INV:US Growth
- NAESX – Vanguard INV:SmallCap Index Fund
- VEXMX – Vanguard INV:Extended Market Index Fund
- VMRGX – Vanguard INV:Morgan Growth
- VGSTX – Vanguard INV:STAR
- VEIPX – Vanguard INV:Equity Income
- VQNPX – Vanguard INV:Growth & Income
- VFINX – Vanguard INV:S&P 500 Index Fund
Timing FT Cloud Strategies
Red = Quarterly trading with no timing;
Grey = S&P 500
1/28/04-1/28/14
Today we released a new feature in FT Cloud version 1.6.0.10: Drawdown Minimizer
FT Cloud modeling produces strategies with good risk-adjusted returns. Now, the Drawdown Minimizer adds safety and consistency.
Here’s a good example:
Quarterly Trading – Past Three Years
A number of FT Cloud users have developed quarterly trading strategies that works well and require very little trading. The chart below is the “VG-9” family, traded quarterly.
Grey = VFINX – Vanguard S&P 500
1/28/2011 – 1/28/14
We see that over the past three years, its been an excellent strategy. We’ve got annualized returns of 19.8% for FT Cloud vs a 14.4% for VFINX over the three year period. And, that’s with a fraction of the volatility. The FT Cloud strategy posted a 3% standard deviation and a 1.89 ulcer index, vs VFINX coming in at 4.8% standard deviation and 4.9 ulcer index.
10 Year Look
Look at a 10 year period. The the quarterly trading strategy had a very significant draw down when the market turned in 2008. In some markets, quarterly trading alone is not fast enough to move assets to safety.
Grey = VFINX – Vanguard S&P 500
1/28/2004 – 1/28/14
The quarterly trading strategy trades every 3 months and then trades us into the best assets in our family. Since FT Cloud strategies are 100% invested and all members of VG-9 family declined in value, the red line experienced a strong draw down. (Albeit more muted than VFINX with a max draw of 47% for FT Cloud vs 55% for VFINX. We still moved into the best funds of VG-9 on the way down)
Improve with Timing
Red = Quarterly trading with no timing;
Grey = S&P 500
1/28/04-1/28/14
In the chart above the Minimizer’s green line removes the steep drawdown of the red line using parameters of 50 and 200. When the 50 day moving average is above the 200 day moving average, we own the red line. When the 50 day moving average is below the 200 day moving average, we move to cash. The gold vertical lines show the timing trade dates.
The green line posted a strong 9.38% annualized return less volitility and fewer trades(no quarterly trades from 7/22/08 – 9/8/09
In summary, the Minimizer’s simple timing strategy improves the FT Cloud asset allocation with less trading.
See below for the list of parameters used above.
Family = VG-9 NAESX, VFIIX, VFINX, VGENX, VGHCX, VGPMX, VUSTX, VWEHX, VWESX
FT Rebalance vs Accutrack
Abstract:
In this discussion we will set up two popular relative strength investing strategies: FT Rebalance momentum and FT4web AccuTrack. Then we will discuss advantages of multi-fund momentum trading with FT Rebalance compared to the two fund AccuTrack strategy.
Analysis
As stated in the abstract, we’ll be comparing the FT Rebalance momentum model and the FT4web AccuTrack model. First we need to lay out the two main differences in the strategies.
1)
FT Rebalance’s is an asset allocation strategy where FT4web AccuTrack is a market timing strategy.
In simple terms, FT Rebalance’s momentum strategy will reallocate assets every quarter (Jan 1, April 1, July 1, and Oct 1). So we have 4 trades a year at the end of each quarter.
FT4web AccuTrack model will trade based on signals generated by the AccuTrack technical indicator (ie when the red fund has more strength relative to the green line: invest in the red. When the green line has more strength relative to the red line: invest in the green.)
So, FT Rebalance will reallocate to the strongest assets on preset intervals (every quarter i.e. 4 trades a year). FT4web AccuTrack will reallocate intermittently when the relative strength of the two funds cross or switch.
2)
FT Rebalance will invest in the best of three funds (VFINX, VINEX, and VIIFX). FT4web AccuTrack will invest in the best of two funds (VFINX and VINEX).
AccuTrack: The two fund strategy
AccuTrack is a popular relative strength trading strategy used by many FastTrackers. In FT4web, AccuTrack and the J chart will trade between two funds based on relative strength (find more info on AccuTrack here).
A standard relative strength strategy could be trading between a domestic fund (VFINX) and an international fund (VINEX).
10 year chart
In the chart above we see that the two fund model worked great during the first five years (7/2003-7/2007) with an annualized gain of 28.95%. But when the market began to turn sour in late 2007 the two fund strategy shows its major weakness: no diversity. Both international and domestic markets took a hit and as a result this strategy lost an annualized 22.10% from 7/2007 – 7/2009.
While the strategy recovered in late 2009 returning an annualized 18.21% from 7/2009 to 7/2013, the 10 years between 7/2003- 7/2013 was a quite a ride. As we see in the first chart in the post (pink line), the strategy had a max draw of 60.28 percent and an standard deviation of 5.8% (just less than the 5.94% of the S&P 500 for the same period).
FT Rebalance Momentum: Best of three funds
In the simple model illustrated below, instead of using a relative analysis of two funds, VFINX and VINEX, we added one more fund VFIIX (Vanguard GNMA) to the mix. VFIIX adds a conservative risk and low correlation fund element to our strategy.
Now, instead of moving our assets to the best of two funds, we will move our assets to the best of three funds.
10 year chart
As we can see in the red line above, adding one more fund to the relative analysis greatly improves long-term performance of the strategy, mainly by giving us a conservative asset like VFIIX to retreat to in down markets (all of 2008, 3Q10, 3Q11).
If we look at the period between 7/2007 and 7/2009 we have a positive annualized return of 2.22%, compared to a -22.10% return of the FT4web AccuTrack model for the same time period.
The lack of diversity hurt the AccuTrack model, as it could only choose between the VFINX and VINEX, both of which were declining in during 7/2007-7/2009. In contrast, having VFIIX as an option in the FT Rebalance momentum model, we can see that the red line smooths out during 7/2007-7/2009 as the model moves to VFIIX.
Summary
This is a very simple illustration of two different relative strength models. As the above analysis shows, incorporating more diversity (three funds vs two) into a strategy can have a strong positive impact, especially on limiting downside risk.
Additionally, we’ve seen a simple strategy that makes 4 trades a year with index style funds can have incredible results.
The next step after this would be to create a family with more than three members. Try 4, 5, or 6 well chosen, diversified funds. Also, try increasing the # to buy to 2, 3, or 4. This will increase your total number of funds held, which could temper volatility. Or, try using the sharpe model to limit the drawdowns.
Leave a comment below or email daniel@fasttrack.net with any questions
FT Rebalance Model Setup
Family:
VFINX- Vanguard S&P 500 Index Fund
VFIIX- Vanguard GNMA,
VINEX- Vanguard International Explorer
VFIIX- Vanguard GNMA,
VINEX- Vanguard International Explorer
Parameters:
Date Range:
7/11/2003 – 7/11/2013
FT Rebalance Build:
1.5.0.8