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The Fallacy of Financial Bloggers

The UK Stock Market 1709 to 2016


The VAST majority of investment bloggers out there are living in cloud cuckoo land. The CAGR for the above time series is 2.55% and that is before adjustment for inflation. Sure we “may” be in a new age. We “may” see huge growth in stocks going forward. We may no longer see those long flat periods you can observe in the charts above. But I see no reason to count on it.

Sadly the stock index looks to be price only rather than dividend adjusted but we have to work with what we can find.

The drawdown? Historically these have reached over 90% for buy and hold stocks. Can anyone live through that? Does anyone want to?

Sure, we may never see 90% drawdowns again. But would you bet on it? I most certainly would not.

I have read so many “academic” papers over the years. I have drudged my way through so many blogs. I have fooled myself so many times into thinking: this time it will be different: this time the system really will weather the storms with low drawdown and volatility because I have now discovered the Philosopher’s Stone. I have traded in and out of horrendous draw downs in search of spectacular back tested returns.

I have survived – both financially and psychologically. But it has not been much fun. Yeah, sure, the tough guys can live through such drawdowns especially if they are not betting the ranch. I no longer can.

The ONLY way you have a chance of minimising drawdown while achieving some growth from risk assets such as stocks is to avoid leverage and to limit your exposure to risk assets.

I believe simple momentum is the best way to select assets in a tactical asset allocation strategy. But I don’t wholly buy the binary approach advocated by so many gurus which goes as follows:

If stocks are outperforming on a momentum basis invest wholly in stocks. Otherwise invest wholly in a reserve asset.

It does NOT work in a Black Swan. Period. Or at least not in every Black Swan. Sure it MAY reduce drawdown but DD can still be horrendous. I have seen drawdown at 50% in back tests using such an approach in the 1929 period on US stocks. Better than the 90% recorded by the straight equity market but still very tough indeed to trade through.

The only chance of avoiding such a mentally destructive catastrophe is to avoid leverage and to avoid ever being 100% in stocks. And never to be in the stocks or bonds of one country alone. Nothing dictates that the USA or GB will survive as havens of relative peace and security in the future. Or any other country. Or, sadly, the world as a whole.

Anyway the charts below represents two different systems.

There are only three possible investments:

  1. A UK Stock index from 1709 to 2015. Cobbled together from various sources by the Bank of England.
  2. UK intermediate Bonds are represented by “Spliced consol yield 1753-2015, corrected for Goschen’s conversion issues” going back to 1753. I have assumed a 20 year constant maturity when calculating the bond index.
  3. UK short term Treasuries are represented by “Spliced series for discount rate on prime short-term paper ” from 1718.

Thus my tests could only commence in 1753 rather than 1709.

Both take monthly data and use 12 month momentum. The binary system invests in the single asset out of the three whose momentum is highest over the 12 month look back.

The 50/50 system invests equally in the top 2 assets. So that stocks never form more than 50% of the allocation at the beginning of the relevant month.

Reallocation is done monthly.

As it happens the binary system on these tests only records a DD of 31%. 1/3rd that of the general stock market in the 1929 period. But I have run binary system tests where it gets a lot worse.  And note well that on this system and this data the maximum drawdown occurs in 1987 not 1929. Well, well, how’s that for a random outcome?

All my data for these tests comes from the Bank of England: Three Centuries of Economic Data



95% of all bloggers in the systematic quantitative trading arena are vastly over optimistic for one or more of the following reasons

  1. They are curve fitting wittingly or otherwise
  2. They lack experience in actual trading (however qualified they may be in mathematics or computer science)
  3. The have not assessed deep historical data
  4. They are greedy and are looking for the end of the rainbow in their own trading
  5. They are dishonest and are seeking to sell a trumped up system which is bound to fail in real trading
  6. They seek to sell books promising Eldorado: an escape from the drudgery of reality

And me? I’m just a disgruntled disillusioned old nutter who just happens to have some common sense and have done a lot of hard work. And bear a lot of scars.

Drawdown max 50% stocks, the balance bonds or commercial paper


VAMI max 50% stocks


Drawdown binary system: all stocks or all bonds


VAMI – the binary system – all stocks or all bonds



Stats for the binary system all stocks or all bonds:


Stats for the 50/50 system: never more than a max of 50% stocks, the rest in bonds or commercial paper.


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