Best way to hold short term UK tracker

masonic

scarletjim wrote: »

So riding that one out would have meant tying up the (already diminished) capital for say 10 or more years with no return / interest.

Not no return / interest. Dividends would still have been paid out.

It is easy to mistakenly think that the FTSE 100 was at 6900 at the end of 1999 and is lower than that now, therefore anyone holding it over that period is still in a loss. In fact, they would be up about 60%.

That's still not very good performance and they would have done much better in the S&P500 (110%) [even though the S&P was grossly overvalued (CAPE >40) in 1999], and better still, no doubt, if they constructed a diversified portfolio and rebalanced it regularly.

...my only query is, how heavily could it fall? I mean realistically, and using history as a guide? Could anyone on here see it realistically falling below 5000 again? How many heavy long-term bear markets have we seen in the last 10 years?

Historically, falls of over 70% are not unprecedented. I would think it is quite likely the FTSE 100 will fall below 5000 at some point in the next decade. It's only a 25% drop from where we are now.

Ryan_Futuristics

scarletjim wrote: »

Yes I can certainly see how that could happen. I can't remember it in recent years, but I remember when the FTSE100 was at about 6900 maybe 13-15 years ago. The tech bubble burst, and it fell to somewhere in the early 6000s. It would have been easy to think of that as a temporary correction, and buy in big. But after that, a combination of big financial scandals, the impact of 9/11, and other economic factors, all meant that it fell much more, below 5000 I think, and never got back above 6000 until recent years. So riding that one out would have meant tying up the (already diminished) capital for say 10 or more years with no return / interest. So yes I absolutely see what you're saying. But...

...my only query is, how heavily could it fall? I mean realistically, and using history as a guide? Could anyone on here see it realistically falling below 5000 again? How many heavy long-term bear markets have we seen in the last 10 years?

That said, it would only take one such scenario to hurt that investment for a very long time, which is why I would never risk what I couldn't afford to pretty much entirely lose. Thanks for the reality check though.

Yeah, market crashes like the tech bubble would be the reset button on that kind of trading - we've had another big crash since then, and some quite severe market corrections as recently as 2011 (most fund managers are positioned quite defensively now, as a drawdown looks likely at some point)

Historically, European markets have had crashes which have taken as long as 30 years to recover from ... And in planning an investment strategy, I think you have to account for a 40% realistic drop at any moment (although many think 5,000 is as low the FTSE 100's likely to go - as it's quite well valued - short of a global disaster or war)

The risk factor on day trading is that you can keep making £500 profits without risking too much, but at some point, the buy-and-hold investor will overtake you because they're able to keep growing their capital - compound interest from reinvested dividends even smooths over big market crashes and means they're still in profit ... So if you keep raising your stakes, the risk of running into the wrong market conditions just looms larger ... There's probably a mathematical proof of why you're unable to keep growing capital this way unless you can predict market movements at some point ... Some people take a slightly longer term strategy, and might invest when the SMA 50 is above the SMA 200 - so the market's clearly rising - and get out as soon as it crosses back ... You do get false signals sometimes, but over a few years, I think it generally works more than it fails (you're following medium-term trends, which are slightly less random) ... Then some people take it a step further and switch into a FTSE 100 Short ETF (an inverted FTSE 100) as soon as the market seems to be falling ... Websites like Portfolio123 let you test these strategies in US markets ... But it's definitely quite a science, and it's not something I've been tempted to try!

racing_blue

Jim this is what happened over thirty successive 10 year periods, starting in 1972

Average gain across the 10 year periods: +222%
worst 10 year period (1998-2008): -7%
best 10 year period (1988-1998): +420%

Or annualised:
Average 12.4%, worst -0.7%, best 17.9%

Based US equity total return index and includes dividends. The data is here http://www.crawlingroad.com/blog/2008/12/22/permanent-portfolio-historical-returns/ and claims the Simba Spreadsheet on the Diehards Forum as original source, cross referenced with Morningstar SBBI yearbook. Accepting this is US not UK, and the past not necessarily a guide to the future.

racing_blue

By my calcs, to match that average 10 year gain of 220%, you would need to successfully execute your strategy of buy low sell high 12 or 13 times, assuming a 10% gain each time. Would you get 12 or 13 bites at the cherry in 10 years?

Actually, put like that, I'm thinking yes - but how would you know when to bite?

(110%)^12 = 314%

Edit: now I'm thinking no. Becuase there would be long periods where you did not get a buy opportunity (strong market) or a sell opportunity (depressed market). For example, the FTSE100 dropped 800 points to 5809 between June and December 2007. If you had taken that as a buy signal, you would have had to wait another 5 years - until 31st January 2013 - for a chance to offload at 10% profit.

Ryan_Futuristics

racing_blue wrote: »

Edit: now I'm thinking no. Becuase there would be long periods where you did not get a buy opportunity (strong market) or a sell opportunity (depressed market). For example, the FTSE100 dropped 800 points to 5809 between June and December 2007. If you had taken that as a buy signal, you would have had to wait another 5 years - until 31st January 2013 - for a chance to offload at 10% profit.

That's when you switch to a FTSE 100 Short ETF

Just as easy to execute the strategy when the market's falling

It's just hard to do it well and consistently

racing_blue

Sounds no more difficult than calling heads or tails 12 times in a row...

Ryan_Futuristics

racing_blue wrote: »

Sounds no more difficult than calling heads or tails 12 times in a row...

Well going long and short on the market takes the most skill - but as much as it's not a strategy that appeals to me, the idea that you can't time the market has perhaps been overstated

Like the case against active investment, to say that the average market timer fails doesn't say anything about how different market timing strategies do (many market timers are simply gamblers)

Take one of the simplest ways to time when to get in and out of the market:



- When the SMA 50 (blue) is above the SMA 200 (purple) you want to be in the market

- When the purple crosses the blue, you want to switch to cash or bonds

You see a few false triggers (where you'd have been in and out pointlessly - note: you'd probably only be looking at the market once a week to make the switch decision) but even a simple method like this would have kept you in the market through most of the rises, and out through the major dip

There are much more complicated methods out there, but in principle this kind of simple 'trend following' system tends to work quite well (but don't take my word for it - see if you can find a backtest for the FTSE 100 first)

racing_blue

Ryan_Futuristics wrote: »

see if you can find a backtest for the FTSE 100 first)

Some backtest data here

http://www.smatrader.com/index.php?option=com_content&view=article&id=65&Itemid=74&lang=en

I am not convinced that a moving average crossover strategy outperforms buy and hold across the majority of time periods.

For example, from the chart you have posted, applying that moving average crossover rule over the last 5 years would underperform. There seem to be 6 cross over points, giving 3 sell/buy pairs. On the first and third you stood still, and on the second you lost money.

Agree it would have been a useful strategy in 2007-2010... maybe there are signals in the wider economy about when to trade like this?

masonic

racing_blue wrote: »

Agree it would have been a useful strategy in 2007-2010... maybe there are signals in the wider economy about when to trade like this?

There are a whole host of technical indicators like this that can be used to predict a bullish or bearish outlook. I'm less enamoured with technical analysis than I am with fundamental analysis, and both seem to have relatively less utility in efficient markets like the FTSE100. Of course, that is not to say they don't work sometimes.

Ryan_Futuristics

racing_blue wrote: »

Some backtest data here

http://www.smatrader.com/index.php?option=com_content&view=article&id=65&Itemid=74&lang=en

I am not convinced that a moving average crossover strategy outperforms buy and hold across the majority of time periods.

For example, from the chart you have posted, applying that moving average crossover rule over the last 5 years would underperform. There seem to be 6 cross over points, giving 3 sell/buy pairs. On the first and third you stood still, and on the second you lost money.

Agree it would have been a useful strategy in 2007-2010... maybe there are signals in the wider economy about when to trade like this?

Yeah, I think it does under-perform the recent market, but not too significantly - and since the 90s it would've be protected you from 2 major crashes, and should still have you a fair way in front (then again I've not seen much FTSE100 back testing, so the 200 and 50 figures might not be the preferred way to track the UK market ... You can have other rules too, such as only switching with it goes 5-10% below, or using the VIX volatility index, or analyst growth predictions)

Where these things can trick you, even when rules have worked for 50 years, is you can always find yourself in completely uncharted territory, where you'd need new rules and hindsight ... But then that's no less a criticism of buy-and-hold (which relies on the assumption that the general trend in markets is up ... For many markets it hasn't been for a long time - and the FTSE has been going downhill since the 90s, inflation adjusted)

Value investing's the only principle I feel confident will keep working (that would still under-perform recently by keeping you out of the US)