TAA: 2014 Year in Review

This was the first full year of real-time testing using a secret sauce version of the TAA system I wrote about here. I used three different baskets of ETFs to see what damage the future would do, each based on a different philosophy, and each trading once a month.

In a year where the S&P500 returned 11.39%, here’s how it turned out:

2014 Return

Backtested Exposure

Backtested
Annual Return

Backtested
RAR

Backtested Max System Drawdown

Backtested RAR/Max DD

Basket 1

1.90%

97.70%

16.80%

17.20%

12.70%

1.35

Basket 2

10.70%

67.70%

7.80%

11.60%

15.20%

0.76

Basket 3

-0.70%

96.50%

17.00%

17.70%

18.00%

0.98

[Slippage and commissions are included, but not dividends]

The best backtested returns (and highest volatility) led to the worst returns in 2014, the worst basket in backtesting was the best performer in 2014, while the most diversified and theory-free basket was closer to the bottom than the top for the year. Exactly as expected, everything is as clear as pea soup. So now what?

I think that mostly depends on psychology. The statistics I chose to display are the ones that tend to push my buttons, so I strongly prefer systems that do well on those measures. If I were a risk-seeking gambler, I’d change the system to trade only the top fund, instead of the top two, and use Basket 3 hoping for a wild and profitable ride.

At this point in life I’m not a risk-seeker (it finds me without any help), so I’m hedging my bets by putting 50% in basket 1 – which I think is the most agnostic about the future – and 50% in basket 2. Basket 2 gets the nod for simplicity. It’s the ringer of the bunch and only switches between the S&P and cash, so it has fewer trades, no fund selection dilemmas, will work even in THE Woman’s very restrictive 401(k), and manages to be out of the market ~1/3 of the time, eliminating a lot of risk from unknown unknowns.

Time will tell…

 

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