All-Weather

eToro-ing Strategies: Part 3 - Backtested Results

For those of you who prefer videos, i have done a series on my YouTube channel here (insert

Link

)

This is not supposed to be detailed instructional into All-Weather, it is too complex for me to describe here and my YouTube videos but i hope it is general enough for my copiers so you do not need a finance degree to understand.

I will probably do a Udemy course to describe the methods in more details, but this is a general overview.

Past results are by no means a reflection of future returns.

But......

i believe in the spirit of the system and human behaviour, the results below are from my back-tested results.

Testing Results

The extreme returns are a result of exposure to real estate in the US, so the gain in 2010 and low returns in 2009 are unlikely to repeat. The loss in 2005 is just an organic under-performance of the system and was partially due to it only being restricted to half a year.

These results are also restricted by the number of years in which the instruments had data.

In view of this, i am reducing the exposure to the Real Estate ETF as well as reducing exposure to the SP500 due to my long term view of this market.

My value add

With the information you have here, you can use this system? Absolutely. If/when i come up with the Udemy course, this will be even more so.

My only value add is

1) i have a macro view of the market,

2) i manage the technical aspect,

3) i understand this portfolio as best i can and

4) that i rebalance this portfolio every quarter. These are elements you can do yourself if you feel up for it!

I hope my intentions are clear and that this portfolio is something that you can add to your investing journey. If not thanks for taking the time to read this and hope you have learnt something!

eToro AUS Capital Limited AFSL 491139. eToro is a multi-asset investment platform. The value of your investments may go up or down. Your capital is at risk.

eToro-ing Strategies: Part 0.5 - My intentions

For those of you who prefer videos, i have done a series on my YouTube channel here (insert

Link

)

This is not supposed to be detailed instructional into All-Weather, it is too complex for me to describe here and my YouTube videos but i hope it is general enough for my copiers so you do not need a finance degree to understand.

I will likely do a Udemy course to help describe the methods in more details, but this is a general overview.

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First to my copiers and followers: Thank you for following me on my journey.

As much as i have enjoyed being a "full-time" trader, returns have been lumpy, (December lost 1+%, mid-January +0.05%) and given the period we have entered, I think we will be entering a period of extended consolidation.

This likely mean i will not be able to trade 1) responsibly and 2) in good conscious.

Why this system?

Only 2 schools of thought have consistently returned good amount of profits

- Global Macro (Soros, Dalio, Druckenmiller, Rogers)

- Micro/Value investing (Buffet, Munger, Pabrai)

As much as people say they have been profitable, a study of the wider universe will show this to be mostly true.

My chosen field has been Macro and I have studied the above-mentioned traders.

This is an application of Dalio's methods

http://news.efinancialcareers.com/wp-content/uploads/Global-macro-trading_djvstock_iStock_Thinkstock.jpg

So why have i not employed this earlier?

Two reasons

1) I have enjoyed employing/studying the reflexive process as this is a more exciting way to look at the world. It is also more lucrative but extremely lumpy.

2) Instruments available now are different from one year ago. The All-Weather system requires certain expression via certain instruments, one year ago before ETFs on eToro, this was impossible. Now we have a not ideal but workable system.

Am i giving up?

Please do not mistaken this as a means of giving up on the 1-year journey. There are ways of trading which i can make about ~30% a year in most trading conditions but lose everything once every 7-8 years.

I have used methods like this before and is VERY VERY common on eToro. I used to earn an average of 7% a month for about 2 years.

But my experience shortly after was similar to a pattern that i saw when i was doing my Masters thesis, you will lose a significant portion of your account (30-80%) after if you keep going down that road.

I have long decided that this is irresponsible and if copiers do not understand this process, you expose them to a chance of earning 30% with the possibility of losing 30%-80%. And most copiers who do not trade themselves will not understand these risk nor want to accept these risks.

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Conclusion

I am not making excuses with my one year challenge, I knew that there will be periods where i would not make money and that returns might be lumpy in maybe 10% of conditions. I was hoping the market would play out in the 90% area. But as the world would have it, we are in the 10%.

You can quantify this but the extended ranginess we are in.

One objective that i have is to be around on eToro for a very long time but given my current circumstances, it is better for both myself and my copiers if i spend 4 hours a day employing this system and work some hours instead of stressing every moment waiting for the next trade.

This is a better way to show my trading "abilities".

eToro AUS Capital Limited AFSL 491139. eToro is a multi-asset invest ment platform. The value of your investments may go up or down. Your capital is at risk.

eToro-ing strategies: Part 2 - Modifcations and Expression on eToro

For those of you who prefer videos, i have done a series on my YouTube channel here (insert

Link

)

This is not supposed to be detailed instructional into All-Weather, it is too complex for me to describe here and my YouTube videos but i hope it is general enough for my copiers so you do not need a finance degree to understand.

I will likely do a Udemy course to describe the methods in more details, but this is a general overview.

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My replication on eToro is probably a poor way of doing it, but it is what we have as certain expressions via certain instruments are just not available.

If you were to follow what was described in Tony Robbins book, Intermediate Government bonds are not available via eToro.

Instead i can only keep the spirit of the All-Weather.

Modifications

http://2.bp.blogspot.com/-cBxzwNheouM/UAiYQfq0ZoI/AAAAAAAAAE4/1C6ciaFAolc/s1600/car+modification1.jpg

I have a liquidity preference and i believe CFDs to be more liquid, i may be wrong here, but it is my belief for now.

Risk parity will change consistently and i have adopted the volatility per day for the last 12 years as a starting point. But risk allocation will be

re-balanced

 and changed depending on my market outlook.

Also in my study of reflexivity and the self-reinforcing cycles, i have added a super simple technical analysis system to try and direct our allocations towards long term self-reinforcing trends. The 200 Simple Moving Average.

Because we are not dealing with currencies, i imagine this to work slightly better in the instruments expressed.

Instruments used

As mentioned above, i do not have access to all the instruments in question via the platform so some improvisation was done.

For instance, the TLT is the long term treasury ETF.

The corporate bond index includes a broad range of

duration

, because our expression of this requires short & medium term bonds as well as corporate credit, i have to take a short position on the TLT to remove large effects of long term treasuries within the corporate ETF.

This is not ideal, but it is the best expression that we have.

eToro AUS Capital Limited AFSL 491139. eToro is a multi-asset invest ment platform. The value of your investments may go up or down. Your capital is at risk.

eToro-ing the world's largest Hedge Fund: Part 1 - Technical Introduction
For those of you who prefer videos, i have done a series on my YouTube channel here (insert Link)

This is not supposed to be detailed instructional into All-Weather, it is too complex for me to describe here and my YouTube videos but i hope it is general enough for my copiers so you do not need a finance degree to understand.

I will likely do a Udemy course to help describe the methods in more details, but this is a general overview.

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Only 2 schools of thought have consistently returned good amount of profits
- Global Macro (Soros, Dalio, Druckenmiller, Rogers)
- Micro/Value investing (Buffet, Munger, Pabrai)

This is an application of Dalio's methods.

This is no secret as Dalio has always been transparent to a very high degree, and he was kind enough to offer an allocation strategy in Tony Robbins book, Money Master the Game.

It involves two important aspects

4 seasons
No not the hotel!

Every economic enviroment can be descibed in 4 seasons.

1.      High Inflation, High Growth
2.      Low Inflation, High Growth
3.      High Inflation, Low Growth
4.      Low Inflation, Low Growth

In any season certain assets will perform well and certain will not.

Source: http://www.wallstreetoasis.com/blog/all-weather-ray-dalios-approach-to-the-ultimate-investment-case-study

Here a graphic of what Dalio proposes.
So if one were to own assets equally, it should be theoretically possible to return in most economic environments and those that you lose it is not too bad.
E.g. when times are Low Inflation, Low Growth. Times are bad, equities are down, the market is cranky. Long Term Treasury bonds and Gold performs well cause no one wants to take risk and rather have a "safe" environment.

2) Risk Parity

The second theoretical part you need to understand is that risk is different per asset.

For instance,
- Google Stocks in Jan 2006 @ $235. Now $832
- 250% increase in 10 years
- 25% Per Year

- 10 year bond in Jan 2006 – Yield 4.30%
- 4.30% per year

This makes sense because bonds have lower risk. But what happens if i borrow money or lever the bonds up say 5x? This will change 10 year bonds return to 21+% a year.

Yes, leveraging increases risk but that is the point of risk parity, changing allocation to match the risk: return ratio for each instrument. 
This is for information purposes only as Zechariah Zheng, or any associated parties with the author of the website, is not registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. 

Zechariah Zheng, or any associated parties with the author of the website, cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing.

Zechariah Zheng, or any associated parties with the author of the website, in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Zechariah Zheng, or any associated parties with the author of the website, accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.