Track Record #5
It is the morning of March 24, and it’s time to take stock of 5 months of investing across our four real portfolios, which were built using AVI strategies across four accounts at Interactive Brokers.
Here are screenshots of what IB is reporting (all data as of the close of trading on Friday, March 21). Here: https://gregbar.livejournal.com/945307.html
A summary of our account balances as of today is presented in the table:
As we can see, the entire last column is colored pink. Over the past five months of our investment activity, we’ve been in the red across all strategies. Admittedly, the S&P market index is also down over these 5 months. But the index’s losses are smaller than those of our strategies: the index lost about 3%, while all strategies combined lost 8%.
Why the strategies underperform the index
It is worth noting one important feature of AVI strategies here. What we are currently observing is by no means the last time that AVI strategies will underperform the index. We have conducted thousands of experiments that show that none of the strategies consistently outperforms the market month after month.
The positive results of staying ahead of the market accumulate over time. Here’s how it works:
When the market declines, a portfolio built using an AVI strategy, on average and statistically, loses more than the market (which is what we’re seeing today). When the market rises, a portfolio built using this strategy, on average and statistically, gains more than the market. Portfolios built using these strategies are more volatile but also more profitable on average than investing “in the market.”
It follows that, on average, the amount by which the strategy outperforms the market is greater than the drawdowns incurred when investing according to the strategy during market declines. Consequently, a positive effect accumulates - over time, “strategy-based” assets end up, on average, so much higher than “market-based” assets that, despite their fluctuations, “strategy-based” assets never again fall below “market-based” assets, resulting in the strategy’s consistent outperformance relative to investing in a market index.
How long you have to wait
When does this happen? When does the superiority of an AVI strategy over investing in a market index become absolute? The answer may disappoint some: it takes between 4 and 7 years. Only after this period has elapsed does the “strategy-based” investment portfolio consistently outperform the “market index” investment in terms of asset value at any given moment, regardless of market fluctuations.
Is that a long time? In our view, no. After all, an investor has 20-30 years of investing ahead of them. But if that seems too long to you, and you’re not prepared to wait and endure the fluctuations, then AVI strategies are probably not the right path for you.
P.S. It’s worth noting that trading with AVI strategies is fundamentally different from trading with leverage. When investing in a market index with leverage, you simply amplify the index’s upward and downward fluctuations by the same amount. But when using AVI strategies, you amplify upward movements to a greater extent than downward movements. This last statement, of course, holds true on average, statistically speaking, rather than for every single price movement. That is why you need to accumulate a substantial amount of data for this effect to become apparent.
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