Time to get cashed up?

[sackofspuds]

Thanks for all the feedback. Some sensible points made.

I wasn't thinking about cashing out completely, more like taking some profits and getting rid of some HYP stocks I have held for ages and that went nowhere apart from down. Pearson was one I sold the other day for example. Gee but it is hard to press the Sell button. Always my problem.

I've got a big chunk of this in my Aegon company pension:
Scot Eq BlackRock Aquila 50/50 Global Equity Index ARC Pn
https://www.trustnet.com/factsheets/p/0 ... yle-pn-arc

I am suspicious of Aegon. Can't dispel the notion that their charges are high despite their claims to the contrary so will sell most of that fund then transfer the cash to Interactive Investor or AJ Bell Youinvest. That's bound to take a while, by which time I may have been cash heavy for long enough to have changed my mind about the imminent slowdown.

[dspp]

Thanks for all the feedback. Some sensible points made.

I wasn't thinking about cashing out completely, more like taking some profits and getting rid of some HYP stocks I have held for ages and that went nowhere apart from down. Pearson was one I sold the other day for example. Gee but it is hard to press the Sell button. Always my problem......

PSON is a buy signal on the Meb Faber TTA system ..........



dspp

[ermintrade]

Fascinating and useful discussion. My own thoughts can be very briefly expressed: If any method of timing the market is conclusively shown to work, we would all be using it, but then it would no longer work.
I tend to behave like eternal optimist, like Train and Smith, even when I don't feel optimistic.
Regards
ermintrade

[Urbandreamer]

I wasn't thinking about cashing out completely, more like taking some profits and getting rid of some HYP stocks I have held for ages and that went nowhere apart from down. Pearson was one I sold the other day for example. Gee but it is hard to press the Sell button. Always my problem.

I totally understand. I have held GSK for at least 7 years. During that time the pipeline ran thin, the managment changed and the principle objectives of the company seemed to change.

Of course I could just adopt HYP strategic ignorence, but really how long do you adopt that position before you become an "idiot" in the ancient greek sense. Ignoring the changes that you see before you.

I sold half my holding a month ago. Now if that were new money, where would I put it?
.....
We are back to the concept in the title, just by virtue of a dislike both of current holdings and parsity of new opertunities.

Sometimes I can really relate to those who buy passive index trackers or ETF's, yet then I look at those index charts and think "there is nothing there but the comfort that even if you lose money, so did everyone else".

[OhNoNotimAgain]

[

Look at a graph of total returns, not capital values and then you will see the benefit of staying fully invested.

[DiamondEcho]

Anyone else moving to cash? If so, what kind of percentage?
I've probably been reading too much Ambrose Evans-Pritchard articles

No.
And I'm surprised you haven't committed suicide yet. He is a 'breathless sensationalist'
http://ipezone.blogspot.com.tr/2009/08/ ... ncial.html 'Ambrose Evans-Pritchard, Worst Financial Reporter'

Everything is 'an existential Sisyphean Armageddon' in the making according to him. Similarly we were going to implode after BREXIT. China was going to implode before that. Trump was going to implode the US. You'll see the pattern. Oh and the suggestion that he's 'an economist', I dug around around on this previously and found no evidence of it [can you?]; seems more like a hack selling 'the end is nigh' headlines to me. I stopped even trying to read his articles a year or two back, he seems to exist in a different and hysterical reality to insightful writers that I have respect for.

[Itsallaguess]

My own thoughts can be very briefly expressed: If any method of timing the market is conclusively shown to work, we would all be using it, but then it would no longer work.

But removing some equity risk, and perhaps even removing it so much that it makes it all the way back to cash, sometimes might not entail such a huge element of attempting to 'time the market', and might have a much more basic goal of enabling the investor to just feel more comfortable.

In these situations, if the investor does feel more comfortable, then the process in and of itself has 'worked', without any real need to complicate things by bringing market timing into the process, or even thinking about if such a process might ultimately be 'measurable' in terms of total-return 'profitability', or indeed a lack of it....

Sometimes, the potential benefit of an action might not be measurable in purely financial terms....

Cheers,

Itsallaguess - around 15% cash, or cash equivalents, and quite comfortable that I may actually be less 'profitable' because of this.....

[GeoffF100]

I have held GSK for at least 7 years. During that time the pipeline ran thin, the managment changed and the principle objectives of the company seemed to change....

I sold half my holding a month ago. Now if that were new money, where would I put it?
.....

Sometimes I can really relate to those who buy passive index trackers or ETF's, yet then I look at those index charts and think "there is nothing there but the comfort that even if you lose money, so did everyone else".

It looks like you sold GSK at just the wrong time:

https://www.google.co.uk/search?rlz=1C1 ... uIyQCw_5:0

If you buy a low cost tracker, you have the satisfaction of beating around 90% of funds.

[Urbandreamer]

It looks like you sold GSK at just the wrong time:

https://www.google.co.uk/search?rlz=1C1 ... uIyQCw_5:0

If you buy a low cost tracker, you have the satisfaction of beating around 90% of funds.

Time will of course tell with respect to GKN. However last year 52% of active "funds" (I don't buy funds by the way) beat the index, NOT 10%!
https://www.cnbc.com/2017/04/10/majorit ... -care.html

And YES GeoffF I do know that Buffett won his bet, and that Active funds have not always done so well. However this thread argues that what you can invest in can change in its future prospects.

If, instead of a XyZ years of bull market, we wind up in a XyZ bear market, where everything drops by 2% a year, is a tracker going to beat buying bonds? You do know that there are "funds" and investment trusts or that you can buy bonds, don't you? Ok I don't buy them, but maybe that's my mistake. Or gold, or cash?

Do you seriously maintain that in all times for all, an index tracker is appropriate?
Some have been there before "The Market Can Remain Irrational Longer Than You Can Remain Solvent"!
It's a quote, look it up, or more important find out when, and what the market was doing!

[GeoffF100]

Time will of course tell with respect to GKN. However last year 52% of active "funds" (I don't buy funds by the way) beat the index, NOT 10%!
https://www.cnbc.com/2017/04/10/majorit ... -care.html

And YES GeoffF I do know that Buffett won his bet, and that Active funds have not always done so well. However this thread argues that what you can invest in can change in its future prospects.

If, instead of a XyZ years of bull market, we wind up in a XyZ bear market, where everything drops by 2% a year, is a tracker going to beat buying bonds? You do know that there are "funds" and investment trusts or that you can buy bonds, don't you? Ok I don't buy them, but maybe that's my mistake. Or gold, or cash?

Do you seriously maintain that in all times for all, an index tracker is appropriate?
Some have been there before "The Market Can Remain Irrational Longer Than You Can Remain Solvent"!
It's a quote, look it up, or more important find out when, and what the market was doing!

You have to be careful with statistics. Unfortunately, some people have a vested interest in being very "careless" with them. The average active fund matches the market before costs. That is simple mathematics. A typical active fund has total costs, declared and hidden, of about 2% more than a typical market weighted tracker. It is pretty obvious that 52% of active funds cannot beat the market (or a low cost market tracker) if the numbers are compiled correctly. (For a number of years the average UK fund outperformed the UK index, because they were underweight in the largest companies, which performed poorly. This was trumpeted as a success for active funds. However, if UK funds were underweight, someone else had to be overweight. That "someone" was funds overseas. The "market" includes all participants and all the investments available to them. My directly held investments count as a "fund" in this context.)

"If, instead of a XyZ years of bull market, we wind up in a XyZ bear market, where everything drops by 2% a year, is a tracker going to beat buying bonds?" Yes, if everything , including bonds, falls by 2%. If just equities fall by 2% per year, they will be soundly beaten by a bond tracker, or indeed a market tracker, because the market does not just include equities. (OK, I buy gilts directly, because I do not see point in paying even the costs of a tracker, but that is another matter. Nonetheless, I do use Vanguard's Global Bond fund which is hedged into GBP. i cannot easily replicate that myself.)

Funds like Vanguard''s Life Strategy aim to be suitable for all conditions, using a combination of equities and bonds with rebalancing. You can implement any other purely mechanical strategy with a passive "tracker", it is just a matter of defining the appropriate index. Vanguard has, however, been known to change the recipe for Lifestrategy, so it is debatable whether it is really a passive fund. Nonetheless, it has passive fund costs, which is what really matters.

[hiriskpaul]

Wow a 50:50 chance of beating the index - what a fantastic result for active management!

I agree there is some evidence that active funds do better against their benchmarks in bear markets than they do in bull markets, but from my reading it is more a case of fewer failing miserably than usual rather than more than 50% beating their benchmarks, but it depends who you believe. Anyway, assuming active funds have a better than even chance of beating their benchmarks in a bear market, all we have to do is flip into active funds at the start of a bear market, then out at the end and we will be quids in (or less quids out). That sounds easy enough. On the other hand, since we have already worked out the start and end dates, why don't we just dispense with both active and passive funds completely and just move to cash during the bear market?

[hiriskpaul]

I dug out some spreadsheets I created about 6 years ago when I looked at Meb Faber's paper and have updated a few of them. For some reason I really cannot remember I used 12 month SMAs instead of 10, but no matter the results at the time all looked very good. I have updated results for the US market. This has continued to do well, but much less so than in the past. I calculate rolling 10 year returns and the TAA returns have been trailing the buy and hold return since March 2016 due to quite a number of unhelpful timing signals. Results are still not bad though, for example annualised 10y return to end of March 2018 was 9.5% for buy and hold, 8.9% Faber TAA. Volatility as always looks better under TAA at 9.4% vs 15.3% for buy and hold.

I have also looked at Japan, but for a UK investor, so market returns converted to pounds and cash returns based on monthly average UK 3 month T-bill rates. Despite extraordinarily good results last time I looked, TAA has underperformed since the end of 2011. Latest results to end March 2018 are 8% buy and hold, 4.5% TAA, with volatilities 14.4% and 10.9% respectively.

Similar figures for the MSCI developed market index in GBP returns, which again looked really good 6 years ago, but started going wrong in June 2012, are buy and hold 10.3%, TAA 7.9% with volatilities 13.8% and 10.0%.

So my overall conclusion is that this TAA strategy does not look as good out of sample as it did before - not at all an unusual outcome!

Just looking through the numbers, one thing that strikes me is the unusually low return on cash that we have been experiencing over the last few years compared with stock market returns over the same period. This has meant that during the out of market periods, many of which were false alarms, the cash returns were very low. I think this might be one of the reasons for the less impressive results. Or it could just be down to there being too many false signals.

Despite underperforming the markets on my tests over the past 10 years, I think the system still has some merit in that it did still deliver much lower market volatility than simple buy and hold, but it would very unlikely for that not to be the case.

[Urbandreamer]

You have to be careful with statistics. Unfortunately, some people have a vested interest in being very "careless" with them. The average active fund matches the market before costs. That is simple mathematics. A typical active fund has total costs, declared and hidden, of about 2% more than a typical market weighted tracker. It is pretty obvious that 52% of active funds cannot beat the market (or a low cost market tracker) if the numbers are compiled correctly. (For a number of years the average UK fund outperformed the UK index, because they were underweight in the largest companies, which performed poorly. This was trumpeted as a success for active funds. However, if UK funds were underweight, someone else had to be overweight. That "someone" was funds overseas. The "market" includes all participants and all the investments available to them. My directly held investments count as a "fund" in this context.)

You do indeed have to be careful with statistics.
For example, does the "typical" active fund have costs 2% more than a "typical" market tracker?

I happen to know that a good number of the active IT's that I own have quite low costs and a good history of returns.
ie
http://www.thisismoney.co.uk/money/inve ... trong.html
F&C ongoing charges 0.54%
SMT charge 0.3%
http://www.hl.co.uk/shares/shares-searc ... e-research

While Virgin Index tracker, which I don't own, costs 1%
http://www.morningstar.co.uk/uk/funds/s ... F0GBR04RWI

Typical? possibly not. However your argument about costs clearly shows that in this case the active funds are cheaper than the index tracker. Also in this case both IT's have a good track record.

BTW it seems that there are more expensive trackers than Virgin.
https://www.ft.com/content/fa2893d6-72c ... f383b09ff9

One obvious point is that a index tracker can NOT "cash up" and wait out a down turn, though obviously you can sell them.

I understand that Capital Gearing Trust has concerns about the market trends and has adopted a defensive position in recent years.
http://www.moneyobserver.com/fund-fact- ... -plc/ITCGT
Though you do pay over 1% for them to manage your assets for you.

So, you pays your money and takes your choice. A cheap/expensive tracker or a cheap/expensive active fund.

As for the idea of changing what you own to suit market conditions, I thought that was what was being discussed in this thread. As I said, I have liquidated some of my holdings for just such a reason.

[GeoffF100]

The OCF represents only part of the costs of a fund. There are also transaction costs. Mifid 2 requires some disclosure of these costs, but the Mifid 2 transaction costs (that are not included in the OCF) understate the real costs, according Vanguard. The real costs of those ITs are may be as much as 2%. Market weighted trackers have much lower transaction costs, because they have much lower turnover. Track record is irrelevant to future performance. It is also important to understand that what matters is risk adjusted return, not absolute return. You can always increase absolute return holding less bonds or leveraging up, but that makes matters worse if the market falls.

Nobody in their right mind would buy the Virgin tracker, but it is still likely to be cheaper than the ITs that you favour.

You can cash up in downturns by selling some equities, but you have no reliable way of knowing whether the downturn will continue. The middle way is to adjust your equity/bond ratio according to what you think will happen next, but you may not get it right. Buying an active fund will not usually help either:

https://www.forbes.com/sites/sharding/2 ... ce12ef7905

Vanguard Lifestrategy buys more stock when the equity markets fall, and sells it when they rise, and attempts to beat LTBH that way.

[Urbandreamer]

The OCF represents only part of the costs of a fund. There are also transaction costs. Mifid 2 requires some disclosure of these costs, but the Mifid 2 transaction costs (that are not included in the OCF) understate the real costs, according Vanguard. The real costs of those ITs are may be as much as 2%. Market weighted trackers have much lower transaction costs, because they have much lower turnover.

If you say so. However others may beg to differ about the transaction costs of following an index.
https://www.ft.com/content/61adb26a-010 ... 0ad2d7c5b5

I would quote from the article, but the FT would prefer that I do not.

However it is, I hope obvious, that following an index does entail transactions, while there are active funds that activly avoid transactions, spending most of their fees in identifying what they think are the right decisions.

Fundsmith is mentioned as an example of an active fund having far lower transaction charges than a given inflation linked bond index, or even Vanguard's 40% life stratergy fund.

Look GeoffF I am not trying to argue the case for active over passive, what I'm trying to do is point out that your arguments are not entirly backed up by the numbers.

Then again, given as the FT article point's out, the difficulty of getting transaction costs, one does have to wonder just where you have got your 2% transaction costs figure from.

Personally I was willing to pay the costs of liquidating some of my assets recently. The decision to sell may have been right or wrong, but avoiding making a decision because acting involved a cost....

[GeoffF100]

Transactions costs of passive funds vary. You need to consider what is going on in the fund. A market weighted tracker is essentially LTBH. I have seen various estimates of transaction costs. Lots of people have an interest in obfuscating them. The biggest cost can be market impact. If you buy in quantity, you push the price up, and if you sell in quantity, you push the price down. Here are the figures that Lars Kroijer gives in his book:

Fund type                   Active       Passive

Management fee              1.00%        0.20%
Other expenses              0.20%        0.15%

Trading Costs
   Bid/offer                0.35%        0.25%
   Commission               0.15%        0.10%
   Price impact             0.25%        0.25%
   Transaction tax          0.25%        0.00%
   Total per trade          1.00%        0.60%
   Turnover                 1.25         0.10
   Total                    1.25%        0.06%

Total costs                 2.45%        0.41%

I do not know whether his figures are accurate, but he was a hedge fund manager, so I expect that he is in the right ball court. Nonetheless, the exact figures will depend on the fund concerned.

[hiriskpaul]

The iShares ETF SWDA is an accumulating world tracker. Year to date it is down 5.7%. A Warren Buffett style portfolio consisting of 90% in this ETF and 10% in cash would be down 5.2%, beating the market by 0.5%. The Vanguard Life Strategy 60 fund (60% equities, 40% bonds) is down 3.4%, so has beaten the market by 2.3%. My Aunt who knows nothing about investing and just uses cash deposits will have beaten the market by about 6%. All of these market beating results were achieved without the use of stock picking. I strongly suspect that the reason that active managers do better in bear markets than they do in bull markets has far more to do with them not being fully invested, rather that their gifted stock picking abilities.

[spasmodicus]

3. But to go back to my question. Are/have any Fools practical experience of these mechanical market timing strategies ? and what were the opinions you formed as a result ?

No, I haven’t got much practical experience of this. However, over the years I have thought about it, while actually applying ad-hoc decisions to trading both in an HYPish (ISA) and a an un tax-sheltered dealing account for fun and profit, as it were. Go on Fools, 'fess up, who hasn't at some point eyeballed charts in an effort to predict their future direction?

Recent market nervousness got me thinking on exactly this question. TA (Technical Analysis) is beset by impressive sounding jargon which does little to illuminate the processes which underly stock market behaviour. Depending on who you listen to, you will get various takes on this, as in the TA versus Fundamental Analysis argument.

The website mentioned by hiriskpaul is a very good example of how this stuff is presented by gurus of the investment community
http://mebfaber.com/timing-model/
here is a superficially well explained argument for a particular approach to market timing with further references to this and attendant asset allocation in
https://papers.ssrn.com/sol3/papers.cfm ... _id=962461
Leaving aside the asset allocation, the timing methodology appears to rely on recognizing crossovers of the daily chart of the chosen asset with its 200day (or 10 month) SMA (Simple Moving Average). There is some elaboration of this in the FAQs (of the first paper), e.g.
FAQ 5. Have you tried various moving averages?
Yes. There is broad parameter stability from 3 months on out to over 12 months. Ditto for EMAs.

That’s a nice woolly justification. Broad parameter stability? The parameters don’t make much difference then? EMA stands for “Exponential Moving Average”, by the way.

Common sense and the Efficient Market Hypothesis suggest to me that excess returns provided by this kind of TA are at best likely to be localized in time, so that broad brush parameters as suggested above are unlikely to be effective in the long term. That said, incremental improvements in short term returns could make a significant difference in the longer term, providing that they are not wiped out by trading costs, due to false buy and sell signals.

I'm continuing to investigate TA further, but so far I'm not convinced that it can be applied reliably on a regular basis

S
(about 20% in cash at the moment)

[hiriskpaul]

spasmodicus, you are right to be sceptical. It is very easy to come up with strategies that look great on backtest. You just have to keep on trying different strategies and parameter values until you find them. I did try to break Faber's strategy by out of sample testing a few years ago, but it gave good results in every stock market I tried and for a range of periods going back to 1970. It definitely would not always beat the market, but on a risk adjusted basis, the results were good far more often than not and it did avoid the full drawdowns experienced in bear markets. A quick look yesterday though gave me bad results over the last 10 years. It could be that I should have been using dollar values in calculating SMAs and crossovers, but that did not seem to matter before.

At some point I will try to have a look at other markets again and do it as per the strategy, using dollar prices for timing signals and 10 month SMAs instead of 12.

I did try a few other simple strategies at the time as well, such as looking at whether the price was up or down over the previous 10 months, but none of these worked as well as Faber's.

[dspp]

Thanks for the various comments and data reviews.

Thinking specifically about the Meb Faber one it depends a lot on the duration of the down leg versus the up leg, and on the lag-time in decision making. Some of the links I gave refer implicitly to this (one of them, Newfoundland, makes reference to running a monthly average at weekly intervals to avoid timing error). I'm not referring to whipsawing, this is a slightly different issue.

Say a down leg is three months long. You'd be typically a month in to it before the 200sma responds and you sell. Then you'd be a month out of it before you buy back. In the two 1-month periods you've had the wrong call the market can cover a lot of ground. When I looked through a lot of charts of the six shares/indices I listed it seemed to me that quite frequently most of the potential gains of the MF TTA are being given up due to its slowness to react.

When you look at the Fabian model you can see how it tries to get around this, without being whipsawed due to over-sensitivity. Then looking at some other models (I'm specifically thinking of the Pentad one https://extradash.com/en/strategies/models/4/pentad/ ) they have backtesting to yield optimal time-periods. Such highly tuned models could get one into a lot of trouble ..... or out of it. But would I know in advance which ?

I shall carry on pondering.

A similar question is to what extent any of you are doing optimal portfolio allocation to try and put yourselves on the efficient frontier ?

regards, dspp