Now that I have been elected as a federal politician in our thought experiment and have put my US investments into a blind trust under your direction, how are you going to invest the funds the next time the ETF2X timer generates a get-out-of-the-market call? Remember that the one caveat is that you must base the investments on the ETF2X models.
Let’s consider the returns of the various ETF2X models each time a get-out-of-the-market call was generated since 2X ETF’s have been available.
Since a long signal has not yet been generated, the last line in the above table is in italics to denote that these are not final values.
So, after reviewing the above performances, would you buy QID (Proshares Ultra Short QQQ) and nothing else since that model has had the best historic performance? If not, then why not?
Let’s consider some more information on the various models. Below are performance measures for the ETF2X models from 08/02/06 to 01/09/09.
The QLD/QID model has the best performance in terms of return but it has the highest ulcer index and the highest maximum drawdown. Therefore, despite the high return of the QLD/QID model you may prefer to not invest all or any of my funds based on this model because the volatility and drawdown will take a toll on your mental health!
So you want to strike a balance between return and risk. If you decided to invest a portion of the funds in each of the models (with the exception of QLD/TIP since the return on TIP investments hasn’t been great) and the percentage to be invested in each model is to be based on past returns only, the following table provides the breakdown of investment per model:
If, however, you wanted to allocate the funds per model based on risk as measured by ulcer index only you would get the following allocations:
I know from e-mail exchanges that the next time I issue a get-out-of-the-market call, some of my subscribers are going to buy Proshares Short QQQ (PSQ) since the risk is acceptable for them and the return is very good. If you scroll to the bottom of this page, you will see that going long the Nasdaq by buying QQQQ and shorting the QQQQ as per my timer has worked very well since June, 2000 outperforming a buy-and-hold strategy by over 20% per year.
As I said earlier, there is no correct answer to the question I posed for this thought experiment but at the very least we should have a logical process in order to formulate our decision.
FJP
