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Improving the index system??

Discussion in 'Shares' started by coopranos, 24th Jan, 2008.

  1. coopranos

    coopranos Well-Known Member

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    There has been a bit of talk lately about creating an indexed portfolio.
    I suppose the trick in investing is to not only pick your shares, but also to pick your time.
    Indexing aims to alleviate the share pick, and holding forever aims to alleviate the time pick.

    Perhaps it is possible to improve on this a little?
    Lets say we hold a ETF like STW, which alleviates your share pick, and some simple technical analysis tool to assist with timing and risk management.

    I wonder if anyone has any trading back-testing software handy whether they could test the outcome of a simple system trading the STW exchange traded fund.
    It would be interesting to see the net return difference between the following:
    1) Just buy & hold and never sell
    2) Buy, sell when it drops 10% from it's previous high, buy when it jumps 5% from it's previous low
    3) Maybe a simple Moving Average system - buy, sell when 30 day MA crosses down through a 150 day MA, buy when 30 day MA crosses up through 150 day MA

    Using something like this would (hopefully) keep you out during the big drops we have seen over the last few weeks, possibly at the expense of a little whipsawing along the way...

    Any comments/ideas welcome!
     
  2. Glebe

    Glebe Well-Known Member

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    You would also need to take CGT into consideration.
     
  3. AsxBroker

    AsxBroker Well-Known Member

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    Also brokerage costs...
     
  4. Rod_WA

    Rod_WA Well-Known Member

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    Aww c'mon guys, why would we take such minor things as CGT and brokerage into account?

    That would not be fair, since we would then be comparing the actual cost of owning shares with the standard fund marketing blurb (something along the lines of "Taxation law can be complex in nature, and you should consult a tax specialist..." and "past performance should not be used..."

    (personally I'm a stickler for after-tax performance; please refer to the discussion on sarcasm taking place elsewhere!);)

    But it's an interesting point. But if we wait for a 10% fall and then buy back after a 5% rise, then anything between a 10 and 15% fall would be a disaster, leading to 0-5% effective loss before CGT and brokerage is considered.

    Given that the market endures a 10%+ technical correction about once a year, we'd be suffering a bit I reckon.
     
  5. coopranos

    coopranos Well-Known Member

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    In light of the last 12 months, which isnt even considered anywhere near a bear market, please explain your definition of the term "given" !
     
  6. dkmc

    dkmc Well-Known Member

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    Time Pickers, Market Timers - Index Funds Advisors, Inc.
    Time Pickers - Index Funds Advisors, Inc.
    Time Pickers - Index Funds Advisors, Inc.
    Read all three pages for step four and
    give us evidence you can time pick

    See figure 4-2
    in 2516 days - explain how you can pick the 20 days that made 100% of the returns

    There is plenty of evidence going against time picking
    thus simple trading systems like those you propose do not have a good foundation
    You need to recover CGT and transaction costs which are huge when using a trading system

    Some might get lucky
    by lucky I mean that the tail end of the distribution curve will mean some pickers will win big - and you hear the stories, but most wont

    Just let go of trying to time pick or stock pick and let the markets do their thing. Go have fun in the mean time
     
  7. Rod_WA

    Rod_WA Well-Known Member

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    2001: -17%
    2003: -13%
    2006: -12%
    2007: -14%
    2008: -23%

    OK, so that's five 10%+ corrections in seven years (plus two more -8% falls in 2005), somewhere about 1 per year. I did say about once a year... I don't reckon I was that far off, and I was working from memory.

    Sell at -10% and wait for a 5% recovery? You'd be 2% better off in 2001, but worse off in '03, '06 and '07.

    By all means, somebody can backtest it and see if it works. Me? I'm just happy to roll with the market.
     
  8. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    This is exactly the kind of stuff I am hoping to get my Compare Funds site to be able to do in the future. Don't hold your breath waiting - there's a lot of work to be done to get it to this point ... but I've been looking for a system which allows me to test various hypothesies (and many oft quoted "truisms" which are more like cliches I feel).
     
  9. Glebe

    Glebe Well-Known Member

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    What are some examples? :) Sounds juicy :)
     
  10. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Well we could start with the simple question of timing-the-market versus time-in-the-market ... but using specific funds as examples rather than broad generalisations.

    Also there is the "most fund managers can't outperform the index over the long term" statement. If most can't - that's fine ... I want to find which ones can, consistently outperform the index. Even if that's just for a satellite investment rather than your core - it's a useful exercise I think.

    Then we could look at how much gearing is too much - for a variety of portfolios, what level of gearing would have allowed you to ride out the recent volatility.

    How about looking at the fear of margin calls ... are they really as bad as we make them out to be ... we could simulate various scenarios and look at the long term ramifications of higher gearing (with inevitable margin calls) versus lower gearing (with inevitable lower overall returns) - to see which one wins in the long term.

    There's all sorts of fun stuff we could do - if we just had the time :rolleyes:
     
  11. JIT

    JIT Well-Known Member

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    Sorry, but that's NOT a 'cliche'! :rolleyes: (if you think it is, then my index fund propaganda is working :D!)

    Very, very few people actually believe this!

    How has your fancy fund picking strategy/methodology faired over the last week Sim??

    Are you still invested, or have you sold out to cash like MW?

    Any 'expensive lessons' learnt?

    Perhaps you missed this pearler from Andrew A on Somersoft, re. stock picking (but the same logic applies also to active fund picking):

    Do you agree or not?
     
  12. samaka

    samaka Well-Known Member

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    Find a way to reduce the brokerage cost - so making regular contributions every week doesn't cost you $20.

    However you can't remove brokerage, so really you want a version of STW in the form of a traditional managed fund.

    This fund though must not pay trailing commissions or charge any entry exit fees at all.

    Also in order to reduce brokerage fees that the actual fund pays, it would only adjust to the index once a month. Regular contributions through out the month are held in cash until the trade day.

    People exiting the fund would have their application processed on the same day.

    The fund would not pay cash distributions - all dividends and interest from cash held through out the month would be buy more shares.
     
  13. dkmc

    dkmc Well-Known Member

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    have a look at the spreadsheet i uploaded this morning on
    the indexing rejigged thread

    It shows 7yr returns of the best funds I could find 3 yrs ago,
    compared to the indexes
     
  14. coopranos

    coopranos Well-Known Member

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    JIT
    Jumping to conclusions without knowing the whole story? That is unlike you!!
    People's "expensive lessons" over the last couple of weeks have nothing to do with stock picking, and everything to do with excessive leverage.
    I doubt an indexed portfolio would have fared a whole lot better over the last couple of weeks, unless a large amount was invested in cash.
    Please enlighten us as to the composition of your index fund and explain how it is a true index system and not sector picking.
     
  15. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Yes, like Coopranos mentioned ... indexing does not protect you during a market downturn ... and I would never make a judgement about the performance of a fund over such a short timeframe anyway.
     
  16. Redwing

    Redwing Well-Known Member

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    *BUMP*


    Reading the Index Threads and I was curious about this as well and looking for a response?