I suck at market timing

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I recently copped to a breakdown. I decided not to continue to be a passive index fund investor merely rebalancing my slice and dice portfolio once per year.(Because smart money is so overrated.)

Instead I decided to jump off a cliff and go all in dual momentum.

My reasons were varied. It really was a spectrum. Everything from the greedy impulse to chase better returns, to the urge to fiddle with my own money, to the overwhelming desire not to lose big chunks of my retirement savings over short periods of time.

And in fairness, I did do a fair bit of due diligence before taking the leap. A bunch of back testing. Conversing back-and-forth with those whose opinion I trusted. Modelling.  But in the end my path was clear. I just had to do it.

And so I did. Which meant I took my diversified 75:25 portfolio, replete with indexes of American large-cap, mid-cap, and small-cap stocks, international and emerging markets Stocks, REITs, and bond funds, and rolled it all over into a single low cost fund.

And then i nervously watched the stock market each day, waiting for a cosmic sign.

Now theoretically I knew from my back tests that it was possible to underperform the broad stock market for at least 10 years or so.

I also knew that tracking error made it quite possible to have inferior returns over two to four years in row (at minimum).

But knowing something intellectually and experiencing it in real time are two different things. So I was hoping for an auspicious start to my strategy.

And so on September 15 I converted my entire much-ruminated-upon, well-diversified, modern-portfolio-theory-approved, retirement account into a simple one fund position. And by the rules of my adopted strategy the position was in VIIIX, (The institutional S&P 500 fund available through my retirement account.) I made the move just in time to see this happen.


Just another little blip…

Seen from a distance this was not such a dramatic series of events. It minor downward blip in the continual slow rise of stock prices overtime. To date it would not even be classified as a “correction.”

But over the time period in question it looked more like this:

Screenshot 2014-10-02 21.36.51


Which still doesn’t tell the whole story.

What I actually experienced was truly more like this:


The horror…

Day one: The stock market plunged more than a percentage point. Thousands of dollars of my net worth up in smoke. Perhaps tomorrow will be a better day….

Day two: Another bad day on the street. Thousands more dollars slipped through my groping fingers. Why must Putin be such an imperialist bastard? He’s ruining my plans.…

Day three: Good news at last, job numbers better than expected. Unfortunately this means that the market is afraid that the Fed will raise interest rates sooner than expected. Many more thousands of dollars down the drain….

Day 14: Damn these Hong Kong teenagers and their impudent demands for democracy. What the world needs now is peace and quiet. Enough principled non-violent protest. Enough Arab Spring. Enough instability.  Because of this ceaseless unrest I will probably have to continue implanting pacemakers until I’m 85 years old.

(Which is to say it’s all been a bit of a baptism by fire.)

A concentrated stock position (even if it’s in an entire index fund) means way more volatility.

Put another way diversification allows you to usually have an asset that’s doing very well, and one that’s doing very poorly, and lots of positions in between. This means that even if emerging markets tank one day, the pain of the money lost will be diluted by the happy surprise that real estate did remarkably well. Blended together it means your portfolio will move up and down in smooth gradual movements.

Concentrated portfolios are more binary. Developments are either really good or really bad. And when news is really bad multiple days in a row, You can actually see your wealth (read future freedom) shrink.  In such circumstances it’s surprisingly easy to picture your own economic collapse.

But here’s the thing. In practice this little stretch actually hasn’t been that hard.

And the reason that I say this is because my prime motivation for pursuing this strategy was its downside protection.

I wanted to avoid losing lots of money quickly.

I was seeking a margin of safety.

And experiencing these two bearish weeks right off of the bat has been paradoxically reassuring.

Had the market soared upwards I would’ve learned nothing.

But with the market jerking ever downward I was able to exercise my mental discipline muscles and remind myself that there could really only be one of three future outcomes.

Either the rapid descent would continue in which case in a month or three the prespecified strategy would demand that I retreat to the safety of short-term treasuries, thus stopping the bleeding.

Or the market would stick in this middle area for a while, in which case I would continue to invest at these now lower prices and collect relatively bigger dividends.

Or the market would rapidly recover in which case I would reclaim all of my lost money just as rapidly as I had lost it.

Which has all allowed me to sleep well at night, thank you very much.

Meanwhile my taxable account in Betterment moved downward with more gentle movements, (though down it still moved.)

But even those downward movements provided me with some good news. Betterment harvested $235 in tax losses from emerging and international markets! This should save me at least $115 in taxes next year. To put this in perspective the 0.25% expense charge by Betterment on my account should only be about $125 a year, so Betterment’s services, which I value highly, are practically free mere months after enrolling in TLH+.

Combined with the intrinsic tax efficiency of the Betterment portfolio, it’s extreme ease of use, and my consequent lack of desire to tinker with it at all, my account’s performance in the wake of this minor downward movement of the stock market, has really made me feel like investing in this manner is a “heads I win, tails I still win” scenario. Which is why I dumped another chunk of money into my Betterment account today despite the recent painfully bearish sentiment in the market.

So yeah. The bad news is that my timing sucks.

But the good news is that it probably doesn’t matter.

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12 Responses to “I suck at market timing”

  1. Kat October 3, 2014 at 4:04 pm #

    Hi Alexi,

    I have friends with nearly as much money as God, and I’ve watched them yell at the TV stock market banner as would a rabid sports fan with their beloved team losing THE game; I have a friend that pulled hundreds of thousands out of the stock market ‘before the end of the world’ a couple of years ago; I have friends that don’t have money skills to be approved for a single credit card; I have been in places where the locals have never even seen a credit card. The fantastic concept here is not that I have lots of friends, but that we all woke up today and get to negotiate and [hopefully] celebrate life in our own unique and experimental way. Thank you so much for sharing your journey, your blog is entertaining and informative and augments my journey.

    • Miles Dividend M.D. October 3, 2014 at 8:42 pm #


      Thanks for the wonderful comment. Sometimes I suspect that writing about this stuff is just too specific and boring.

      But Your observations really get at an important truth.

      Money is damned interesting.

      Like sex and politics, discussing money is often controversial and frowned upon.

      But If you want to know what someone really believes just look at how they save, spend, and think about money.

      Economics is philosophy. I’m convinced of it.


  2. VL October 4, 2014 at 10:06 am #

    Hi Alexi,

    I’ve enjoyed reading the Antonacci website you referenced in your previous posting and it’s been really interesting to learn about this idea of relative and absolute momentum. What I haven’t been able to find on his website or his academic papers (though I freely admit that I may have completely missed this) is how exactly to implement the strategy? He mentions that it is going to be described in greater detail when his book is released, but it seems like you have already been able to get a GEM-style portfolio started. What are you using to guide you?


    • Miles Dividend M.D. October 4, 2014 at 11:27 am #


      The absolute momentum paper has a good description of absolute momentum. It is simply a total return in excess of T-bills during the Lookback period.

      Relative momentum describes the comparison of two asset classes total returns over the look back period.

      When you compare 2 assets +T bills (or in my case short-term treasuries),you have a dual momentum screen.

      For global equities momentum I have chosen to use VIIIX, fspnx, and VFISX and a six-month Lookback period. Antonacci uses total bond market in place of short-term treasuries.

      if I had a low-cost liquid emerging markets fund among my 403B options I would include that in my screen.

      I have back tested the strategy to the early 90s using portfoliovisualizer.com (VFISX, VFINX, and DFALX). The results are not as good as those reported by Antonacci, (Presumably because of expenses/tracking error in real-world funds)but they’re pretty darn similar.

      Hope that helps.


      • VL October 6, 2014 at 3:51 pm #


        Thanks for the response. I think the paper entitled Risk Premia Harvesting through Dual Momentum actually had a really nice description of what they are trying to do. A couple of quick questions for you
        1) Why did you pick a 6 mo lookback period rather than a 1 year period as he seems to advocate? It would appear that there isn’t a major difference in the results according to the paper, but I’m just curious.
        2) Do you think there’s any significant drawback in using short-term treasuries versus using total bond market (or Tbills) as the absolute momentum safe haven?
        3) Would you ever consider doing this in a taxable account to possibly take advantage of more investing options and poss do the full diversification you had wanted to? Particularly since the composite dual momentum appears to *significantly* reduce drawdowns.
        4) I feel like though this seems more complicated, it will still require only doing something once/month, correct? Every month, check which of your US equity and Global equity ETFs have done better over your lookback period, and if that ETF has done better than T-bills over the same period, put your money there. Otherwise, put it in T-bills (or whatever your equivalent is)

        I’m thinking ultimately I may try this with a combination of IVV/VEU w/ BND or EDV (this is what’s available in my retirement account). I still think the majority of my portfolio is going to remain as is but I think there is enough information here to at least warrant giving this a honest shot for a long period of time.

        Thanks again for your help Alexi,

  3. Miles Dividend MD October 6, 2014 at 5:47 pm #


    1. I think the 6 months vs 12 year question ends up not mattering so much. I chose 6 months because:

    -I have been using CXO advisories simple ETF momentum strategy (5 month look back) for a while in my HSA account and am comfortable with that timeframe.
    -There are no trading costs associated with my 403B, so I will only pay for more trading in the form of bid ask spreads, which should be zero for mutual funds
    -The shorter the look back the less you can lose in any 1 asset class prior to switching (ie you switch when you lose 6 months worth of gains relative to Tbills, as opposed to 12 months.) Though you may get back in too soon, this just seems behaviorally easier to me.
    -The back testing was equivalent to a little bit better with 6 month look backs.

    2. the draw back of short term treasuries is less yield, the advantage is less volatility/interest rate risk for my “safe” asset. What I really want for my safe asset is safety. You could just add a total bond fund to the eafe/S&P mix in addition to short term treasuries as your absolute value screen. (Worth backtesting.) When it comes to ETFs/mutual funds I believe short term treasuries will outperform T-Bill funds because of cheaper expense ratios, and buying and selling actual Tbills on the secondary market is probably pretty expensive for retail investors too (lots of friction.)

    3. I wouldn’t want to take all of the short term capital gains associated with this strategy in a taxable account. For taxable accounts I sincerely believe that its hard to be more efficient than buy and hold with betterment with TLH. And I am convinced that there is no easier way of investing.

    4. I agree. This method has 3 big plusses for me:

    -Limited downside/drawdowns
    -Behaviorally easy.
    -A real shot at improved upside over the long haul since it will allow me to take more equity risk during bull markets.

    IVV/VEU/BND should work well though I would favor SHY over BND (or BND and SHY over BND alone.)

    If you have access to VWO or another low cost emerging markets fund you should back test including that as well.

    I’m glad this stuff is as interesting to you as it is to me.

    Good luck!

  4. Ian Tseng October 7, 2014 at 3:43 am #

    I went to buy Antonacci’s new book only to find that it isn’t out yet. Amazon had a book “frequently bought” with it called Asset Rotation by Matthew P Erickson. It seems to have some similarities to what I can figure out about dual momentum. It basically talks about using a handful of ETFs and some market indicators to get in and out of asset classes. They test their theories going back to the 30’s to get better returns with lower risk. I’d be interested in knowing what you thought about it. I am trying to figure out exactly how to implement it for myself.

    • Miles Dividend M.D. October 7, 2014 at 11:09 pm #


      I think Antonacci’s website (and particularly his Whitepapers) have a wealth of information on how to implement a dual momentum strategy.

      I will buy gary’s book simply to support him, because his research is so meaningful to me.

      I’m not familiar with “frequently bought” but it sounds quite interesting.

      Please keep me informed if you read it and like it.


  5. Grant October 15, 2014 at 7:45 am #

    Alexi, this is fascinating stuff! But I’m still shocked, though, that you’ve gone from being a died in the wool passive indexer to such an active strategy!

    I’ve read the dual momentum paper on the website and bought the Kindle version of the book. It is really amazing and I must admit I’m tempted to make a move. It’s incredible that the 4 module composite strategy returned 14.93% (compared to 11.49% for US equities) yet with a maximum drawdown of only 10.92% giving a Sharpe ratio of 1.07! If I do it I’ll go with the GEM strategy, though.

    I agree it needs to be done in tax sheltered accounts only. In Canada we have less tax advantaged space than Americans, such that I have only about 1/3 of financial assets in tax advantages accounts. Vanguard has recently released a Canadian currency all world ex-Canada ETF so that would work with a Canadian equity ETF.

    In your taxable account have you stuck with your 75/25 asset allocation, or have you altered that?

    If current market conditions persist to the end of the month, I imagine you’ll be out of equities. Yesterday, the Toronto market closed just over 10% down from the peak, so we’re officially in a correction now.

    This strategy appears to be very solid, although because other market timing strategies (technical analysis, 200 day moving average etc.) have such a bad reputation, it does make me a little wary. Is it really different this time?

    • Miles Dividend M.D. October 15, 2014 at 10:27 pm #


      I can’t really believe it myself.

      I still believe that passive indexing is the smart money bet in almost all circumstances.

      In terms of my taxable accounts I am still plain-vanilla 75/25 with betterment. I’m convinced that there’s no better product for a taxable account. The tax loss harvesting algorithm has already harvested almost $600 in tax losses with this recent downturn which should save me $300 in state and federal income taxes at at my marginal tax rate come tax time.. This is compared to my total expenses for betterment of $150 per year!

      I’m increasingly convinced that dual momentum is a good match for me because,

      1. I am a big believer in human irrationality. Momentum is merely a bet on this observation.

      2. I am willing to trade some upside and tracking error in order to limit my downside. The drawdown protection is Paramount to this strategy in my eyes . in my back testing I do see that the strategy can underperform for five years easily.

      3.for me, this approach should be much easier behaviorally. To put it in perspective, if the S&P drops three more percentage points before the end of the month I will be required to divest into short-term treasuries. If on the other hand it starts rebounding, I won’t have to.

      To each his own. But for my own biases, I think this is the best match.


  6. Grant October 16, 2014 at 6:37 pm #

    Alexi, the more I think about, the more I become convinced that this strategy is something I should probably adopt. A bit more reading to do, though. I think if any factor can persist it will be momentum because of it’s behavioural basis.

    When you say in your back testing dual momentum can underperform for up to 5 years, do you mean a 75/25 portfolio or the S&P?

    I agree, Betterment is great. I hope they come to Canada one day. We have a company called Wealthsimple, but they are based on the Wealthfront model, whose strategy is too active for my liking.

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