Printer Friendly

eMail Article

September 17, 2008

Risk Tolerance
by Bill Rempel

You've either got it, or you don't. These are the kind of times that will teach you about yourself as a trader or investor; if you thought you had it, but really don't, you're feeling it right now.

Believe it or not, there are multiple stock market strategies for those without risk tolerance. You know who you are.

The Timing portfolio is holding lots of cash right now, and is down -5.41% YTD in 2008, including today's market drop, which brought the SPY (an ETF tracking the S&P 500 index) down to -19.42% YTD, including dividends. The Timing system is designed to avoid markets like this. It'll never shine too brightly, but it'll rarely break your heart, if you're one of those that can't take the heat. The other strategies that I track are designed for those more tolerant of risk.

OK, now's a good time to apologize for my language, because I've been deliberately misusing the word "risk" - in the same way that most people do in the vernacular. I'm really talking about volatility of returns - because "risk" is a very personal thing. From my point of view, a static constant, but low, return from something like CDs would be very risky, because it would greatly increase my odds of outliving my money and vastly decrease my chances of early retirement. That's an unacceptable risk to me, so I tolerate volatility a little better than most.

The Aggressive portfolio took a really big hit today, losing over 9%. I don't keep daily historical statistics, but I'm pretty sure it's the biggest one-day hit it would have taken in backtest. Year to date this portfolio is down -16.47%, including today's action. I'm personally trading this portfolio with my own money, although since I switched from the Rotational system to Aggressive earlier this year, I'm "only" down -14.34% YTD, including today. Guess what? I'm not budging. I'm going to continue to trade my system by the book, because I have confidence in the backtesting and development process, and I have a high tolerance for volatility.

The Fundamental strategy that I track isn't doing as well; I suspect that many of the, ahem, "fundamentally" strong stocks it seeks are the same ones that are being liquidated by players in trouble today. This strategy is down -19.52% YTD.

Rotational is a strategy that went from "first to worst" in the last twelve weeks or so, and is now down -24.81% YTD. At the end of June it was up for the year, over 7%. As a trend-following strategy, it got hammered in the commodities bubble burst.

The recently-added Value strategy is too new for a YTD number to be useful. It's down -6.19% from inception.

My favorite analogy for my style of trading is long-distance running. My style is boring and mechanical; repetitive; my equity curve goes up hills and down hills. In testing, I've found many effective strategies that have a year or more of equity drawdown, or consecutive years of underperformance vs. the broader market, and I've even written about this as a major reason why the anomalies capitalized on by mechanical systems will never be arbitraged away -- most people don't have the discipline to follow them.

If you've followed my writing for any length of time, you've noticed how I report my returns. I show the last month, three months, six months, year to date. But I ALSO show 1-year, 2-year, 3-year, and returns since inception (I've been publicly tracking my trades since early 2005). Why? Because I believe in focusing on the LONG TERM, and that focus allows me to see past any current volatility and be more tolerant of "risk."

If you'd like to become of member of The Rempel Report, you can register here. At The Rempel Report, I track model portfolios for five different mechanical trading systems, as well as my personal portfolio, and disclose all results (good and bad) at regular intervals. Members receive email notification of new posts and can contribute to the site through comments. Registration is still free!

Bill Rempel
The Rempel Report

Disclaimer: Nothing at The Rempel Report, or any communication from The Rempel Report or its author, should be construed as personal advice, on investing or anything else, and at all times you are responsible for your own actions and you should perform your own due diligence. I'm not an investment professional, and you should probably consult with one, in addition to doing your own due diligence, before making any investment decisions.

I may have a beneficial position in any potential investment I mention. My positions in, and opinions of, those potential investments may change over time. I have no obligation to reveal those positions, and if I should reveal those positions, I am under no obligation to notify you, though this site or through any other means, if I change those positions.

While I do try to verify much of the data presented, I can make mistakes. I rely on third party vendors for data, and sometimes that data could be incorrect. Therefore, I cannot and will not be held liable for incorrect or erroneous data presented in text, table, chart, or other format. This is one more reason why you should consult with an investment professional, in addition to doing your own due diligence, before making any investment decisions.

Modeling is prone to error, and no statistical model is perfect. The output from statistical or predictive modeling should be viewed with skepticism.

Fundamental analysis is based on examinations of company filings such as income and cash flow statements, balance sheets, quarterly and annual filings, proxies, and other such items. Even though a company appears fundamentally sound today, that doesn't imply they actually are, or will remain, fundamentally sound. Fundamentals can change over time, and there is always the possibility that the company filed information that was either fraudulent or incorrect. I might make an oversight or error when examining company filings. In many cases, I will rely on a third party's presentation of filing data, such as a stock screening program's output, without actually reviewing the filings personally.

Technical analysis is based on the study of historical price, volume, and sentiment data over time. Past performance is no guarantee, and there are no certainties hidden in patterns, charts, indicators, or formulae.

FundaTechnical analysis involves those items which mix elements of Fundamental and Technical analysis, including valuation metrics such as the Price/Book or Price/Earnings ratios. Therefore all the warnings for both Fundamental and Technical analysis apply.

Take responsibility for your own actions. You should consult with an investment professional, in addition to doing your own due diligence, before making any investment decisions.

Copyright © 2005-2008 Bill Rempel

Image rendition and html coding Copyright © 2000-2008 SafeHaven.com

« BullionVault.com -- Buy gold online - quickly, safely and at low prices »
« Honest Money: A History of U.S. Gold & Silver Currency -- by Douglas V. Gnazzo »

« Opinions expressed at SafeHaven are those of the individual authors and do not necessarily represent the opinion of SafeHaven or its management. Articles are available via RSS/XML. Please visit RSSHelp for instructions. »