I’m signed up for the free trial on P123. Now…where the rubber meets the road–I can’t figure out how to implement a screen for VC2 with O’Shaughnessy’s value composite criteria. Any chance you could point me towards something that could help me? THanks.
If I can make this work, given the added over-market earnings, the fee will be peanuts…
Hi Paul- Do you have any thoughts on Cambria’s new etf: TAIL (http://www.cambriafunds.com/Data/Sites/34/docs/Cambria_TAIL_Prospectus.pdf)? Or, the general strategy of using put options as defensive protection for a long-only portfolio? Benefits/drawbacks for a globally diversified quant portfolio using the SPY-COMP approach?
Thanks
Not a fan of using put options as a hedge. So, not a fan of TAIL. Just makes it easier to lose money is all. I calculate that at current option prices and interest rates, the expected return of protecting against a 10% downside is about 3% a year. Add their 0.59% in fees and the expected return of TAIL right now is about 3.6% a year. This will change with interest rates and volatility but that’s what it is now. I’d much rather use a pure TAA approach or a TAA/Quant approach protected with a SPY-UI or SPY-COMP indicator.
Paul
No easy way around that part. Just need to dive in, learn the tool, and learn how to implement the strategies. You just need to learn how to do screens and custom ranking systems to get strategies up and running.
Paul
Very timely reminder in the face of all the overvaluation talk. I was surprised to see 5yr returns for the SP500 so high when CAPE >20. Most of the articles in the popular press seem to imply returns would be negative over this period when valuations are high. Good to see the actual data!
1994 to 1998. CAPE went from 20.5 to 32.3. And then it kept going up for two more years to 43. Crazy times!
Paul
Nice write-up Paul! With my TAA strategy implemented, I’ll be ready when valuations return to historical norms (unlike in 2000 when I was B&H). The one thing I still struggle with is the tax bill from using TAA strategies in my non-retirement accounts. Any suggestions?
Best suggestion I have is to use the lowest turnover TAA strategy you can. Like GEM.
Paul
Would really love to see a post on tax strategy for TAA and quant portfolios. I always assumed the excess returns of AGG3 or AGG6 made them better than GEM even in taxable accounts, considering that most of the short-term trades in the AGG strategies are losses and the big winners tend to be held for more than a year. Would definitely be interested to see whatever info you have on this.
Would also be interested to hear about any backtests you have done on modifications to GEM (using total U.S. stock market instead of SP500, TAA bond instead of BND, etc.).
I won’t be doing any tax stuff. Too individual and too complicated.
Paul
Any resources you recommend for this then? Any tools that can backtest strategies with taxes taken into account?
Don’t know of any. Manually is the only way that I know how to do it.
How come the GEM strategy was posed as a comparison? What about the IVY (GTAA) Portfolios? Thanks for all your information.
I love this idea of adding a recession flag to a trend following system. I’ve studied trend following off and on before, but no matter how I tweaked the system, the more accurately I accounted for real-life slippage like price gaps causing bad stop executions, the worse it underperformed buy & hold. The drawdown & risk/reward were better since you could always count on dodging the bears, but you got nibbled to death by whipsaw ducks much of the rest of the time. As long as the recession warnings are reasonably accurate, this will let you avoid the ducks and still dodge the bears.
And I recently realized there’s another benefit to the reliable bear-avoidance of trend following that I haven’t seen mentioned anywhere before: if you know you’re safe from bears, then you don’t need any stinking bonds. Especially with the lousy bond returns these days, getting rid of bonds alone should boost your portfolio returns way more than any trend following losses. That alone is probably enough to make even full-time trend following outperform buy & hold. Time for me to run some more simulations.
Because it is the only one that I could construct a data series back to the great depression.
Paul
Rick, you absolutely right that less signals, lower turnover, less false positives, etc are lower with a recession based system. That is one of its strongest points. I also agree with your second point. At the minimum having a reliable trend following system allows one to allocate less to bonds which in today’s environment have lousy expected real returns.
Paul
hi
thx for the post.
have you ever looked at using random portfolios to benchmark performance of these TAA portfolios?
https://www.capitalspectator.com/the-case-for-using-random-benchmarks-in-portfolio-analysis/
thanks.
Hey Paul,
Good post. I enjoy reading your posts about the economy and composite indicators. I am trying to follow along and understand the associated SPY-COMP system.
However, I may be getting a little confused. Previously I think you posted about a Composite Indicator that had 6 factors. In this post you are using a Composite Indicator with 24 factors that is using the “pros” inputs.
Going forward in your COMP-SPY system are you using the 6 Factor Composite Indicator or 24 Factor Indicator?
Great work as always. Thank you.
Thanks again as always Paul.
Reading your articles really make me want to put some time aside to educate myself more on these matters. I only started playing the guitar a year ago, so I guess I’ll have to split my time!
Cheers.
Yes, COMP only has 6 individual indicators. We just started assigning numeric score to the list of pro composite indicators we track just to get a quantitative gauge of what they’re saying.
Paul
