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I’d like to discuss correction that we’re all witnessing now. I don’t want to spread fear but talk about whether we should do anything about it or rather keep going as usual.
The hard facts are:
1) We experience severe drawdown (in just few days it exceeded 5 years max DD for most strategies) – and there is a (quite high in my opinion) possibility that drawdown will deepen
2) Our hedges are not working very well (TLT/TMF doesn’t work at all, GLD is not much better, only thing that kind of works is EUO)
3) The correction started at beginning of the month after very good January, so our strategies are at nearly full-risk mode.It’s hard to predict right now if it’s “healthy” correction and everything will go back to “normal” (or some “new normal”) or it’s just a start of some longer bear market.
So, what can we do about it? First idea is to do nothing, just wait for the month to end and then rebalance portfolios as usual. One can also think of adding risk to portfolio (to recover faster) or switch to less risky one (to be more drawdown proof), even to go fiat.
What I’m considering right now is rebalancing earlier, near 15th Feb. From what I see it’s enough time for the strategies to adjust a bit. The thing is even if strategies are slowly allocating less to risky assets, the rebalancing will rather not lead to having lower allocation of risky assets in portfolio. Eg. even if SPXL allocation goes from 80% to 70% when running QT now, SPXL went down more than 20% during last week, so we’d actually have to buy more of it.
What are your thoughts? Are you going to do anything?
I plan to do nothing but follow the strategy I subscribed to, being 3x UIS.
As a new subscriber, such a drawdown straight off the blocks is deeply challenging however is (currently) less than the backtested maximum drawdown result so the best action, I can only conclude, is no action.
The only worrying aspect was the February signal for 1x UIS was 50% SPY however for 3x UIS it was 80% SPXL (indeed an increase from 70% in January ) which made me wonder if there was an error in one or the other.
I’d be grateful for LI’s view on the divergence in strategy in this February’s UIS/3x UIS.
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I’d be grateful for LI’s view on the divergence in strategy in this February’s UIS/3x UIS.
[/quote]I’ve asked exactly this question twice, but no answer yet. What I suspect is difference in hedging between Hedge and 3xHedge substrategies and also the fact that SPXL is not exactly SPY x 3 (the difference is not a big one). What’s more those 2 strategies have very different lookback period and other parameters. So those two can be regarded now as two independent strategies now.
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I’d be grateful for LI’s view on the divergence in strategy in this February’s UIS/3x UIS.
I’ve asked exactly this question twice, but no answer yet. What I suspect is difference in hedging between Hedge and 3xHedge substrategies and also the fact that SPXL is not exactly SPY x 3 (the difference is not a big one). What’s more those 2 strategies have very different lookback period and other parameters. So those two can be regarded now as two independent strategies now.
[/quote]The 3x strategy is the most aggressive and risky. It’s hard to keep emotion out of this when you see your account shrink on a daily basis and one only wonders how much more loss could come and that’s natural.
But Frank has said many times that over the long term, following the signals is better than becoming emotional and selling at the worst time.
August 2015 had a big drawdown last week of month similar to what we are witnessing right now. Can’t predict the future, but staying steady and true to the strategy paid off then and I trust will now.
I won’t lie and say I’m not tempted to just go to cash when this happens, but if I did, then when would I get back In? Since I really don’t need to use my account in the need future, I plan on riding the blue line vs the orange. That’s why I subscribed.
I agree Deshan – if one exits on emotion, against the strategy indicator, then what determines the re-entry point?
When I was doing my due diligence on LI, I compared LI’s sharpe-ratio based signals to long term moving average signals and I concluded, to my surprise at that time, that LI’s results were better than I could achieve with MA’s. In particular after observing a correction in the backtest period, LI’s signal re-entered more quickly than the MA.
Please don’t focus so much on exiting the market, this is just one option and not a good one in my opinion. But what about rebalancing earlier? Or maybe – this may be controversial – it’s time to include MYRS in portfolio again (if it’s not already there)?
Hello I´m a new subscriber interesting conversations in this Forum.
Gentlemen in my experience is always the best to follow the strategy and keep emotions out at all costs if you chose a high volatility strategy you must be a strong character.Even the most experienced investors will find it hard to digest. Volatility spurs emotions which are hard to control, causing investors to exit positions immaturely.[quote quote=50082]Hello I´m a new subscriber interesting conversations in this Forum.
Gentlemen in my experience is always the best to follow the strategy and keep emotions out at all costs if you chose a high volatility strategy you must be a strong character.Even the most experienced investors will find it hard to digest. Volatility spurs emotions which are hard to control, causing investors to exit positions immaturely.[/quote]
Yep. Looking back, staying true to the signals is working out well.
I agree. The most important part of these strategies is to stay invested. As soon as emotions get involved you will exit at the worst time and then procrastinate about when to get back in. Usually this is much later than you should have.
The approach that I take, to protect my emotions and my account, when the market is dropping, is to partially hedge my portfolio by buying SPY or even SPX puts or selling emini futures. Even though this does not fully hedge my accounts it does preserve my sanity and nerve and most importantly keeps me fully invested in the LI strategies.
I then just try to close the puts or futures for a profit somewhere down the line so that I know that I am “ahead of the game”.
However, even if I have just broken even or have a slight loss on these hedges they have done their job by stopping me from worrying about my portfolio (and exiting at the wrong time), and staying fully invested.
6 months later, strategy and market at all time highs…
Apt time to revisit this discussion. I have taken a similar approach to Richard above but tend to stick with selling e-mini against the portfolio rather than buying puts/writing calls. I cannot say this has always been successful as it does rather depend on the assumption that there is more downside ahead. The most success I had with this was selling into very over-extended upside rather than after some downside momentum already built up. If you wait for the latter then in recent years you invariably ran into the buy the dip crowd before you are out and you end up closing the e-mini with a loss even though the portfolio has compensated and you avoided some downside volatility. Overall I find running the strategies as they stand is the best bet and personally I run some shorter term algos which do attempt to extract value in the mini’s independently of the LI strategies.
Interesting that the very next day after my post, the strategy began a nose dive.
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