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.
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.
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
VFIIX- Vanguard GNMA,
VINEX- Vanguard International Explorer
