"Do the ETFOptimize Strategies Protect Me from Big, Mid-Week Selloffs?"

 

This week, both one prospective subscriber and one of our new subscribers asked: "Do the ETFOptimize strategies offer any protection in the middle of the week if we get a big selloff?"  We have also received this question from many others in the past. The reason we get this question so often is likely because so many investors have been burned by individual stocks – particularly small-capitalization individual stocks – that will get hit by surprise lousy news in the middle of the week.

The investor inevitably sees their equity in the individual-company stock – their hard-earned money – drop by -10%, -20%, -30%, or even more – sometimes before the market opens for the day.

The answer to whether our strategies protect against mid-week losses is undeniable:
YES!

However, the way that our strategies protect you from these types of losses is probably not in the way you might imagine. As a matter of factual record, historically, the ETFOptimize strategies have NOT taken a big dive downward at any time in the past.

However, if you are using a strategy that holds only one position – and that position might sometimes be a 2X-leveraged ETF (for example, in the S&P 500 Bull/Bear Strategy), you are more likely to see an unexpected short-term loss. But for the other models that hold more than one position, they are designed so that those positions have built-in diversification from one another.

The ETFOptimize utilizes varying stop-loss criteria – varying by seasonality – built into the Sell-Rule algorithms of several of our strategies, if appropriate (i.e., if they clearly improve performance in thousands of evidenced-based backtests and live, out-of-sample trades). However, the details of these weekly stop-loss algorithms are proprietary, and we do not disclose them. If the stop-loss criteria are met, your strategy will advise that it’s time to sell that position on the weekend, you should make that trade at mid-day on Monday (Tuesday, if Monday is a holiday).

You should NOT apply an additional intraday stop loss to the recommended ETFs in your model!

 

Intraday Stop-Loss Orders Applied to One of Our Most Popular Models

Let's get right to the point at the top of this article. This section will show 1) one of our most popular ETF-based investment strategies (Adaptive Equity+ (2 ETF) Strategy) in standard format as offered to subscribers, then we will show you 2) the effect of adding a -15% Stop-Loss Order to the strategy, and finally, 3) the impact of adding a tighter -10% Stop-Loss Order to the model.

In standard format – without any modifications – from inception on July 1, 2007, through January 18, 2020, the model has provided an Annualized Return of 37.76%. The investment of $100,000 in July 2007 grew to $5,571,994 by 2020 (12.5 years). *Past performance may not be indicative of future results.

 

Adaptive Equity+ (2 ETF) Strategy - No Modifications: (37.76% AR)

Chart 1: This is the Adaptive Equity+ (2 ETF) Strategy with performance since inception as it exists on January 18, 2020. It has a near 38% Annual Return.

If the subscriber were to add a -15% Stop-Loss Order to the ETFs in their model, they would see a -8% annual decline in performance, and the investment growth would drop from $5.57 million to $2.65 million – a reduction of $2.9 million (-52%).

 

Adaptive Equity+ (2 ETF) Strategy - 15% Stop Loss Added: (29.85% AR)

Chart 2: Same Strategy with a -15% Stop-Loss Order added. The performance drops by about -9% to about 30% AR. Investment growth drops from $5.6M to $2.6M.

If the subscriber were to add a tighter -10% Stop-Loss Order to the ETFs in their model, they would see a -21% annual decline in performance, and the investment growth would drop from $5.57 million to $713 thousand – a decrease of $4.9 million (-87%) in the amount an investor would have after adding a -10% stop loss.

Adaptive Equity+ (2 ETF) Strategy - 10% Stop Loss Added: (16.95% AR)

Chart 3: Same Strategy with a -10% Stop-Loss Order added. The performance drops by about -21% to about 17% AR. Investment growth drops from $5.6M to $713,000.

 

It is pretty clear from these charts/data that adding a Stop-Loss Order to the ETF investments selected by this model creates an unnecessary, clear, and present danger to the results you will achieve. The reason for this is that mid-week Stop Losses tend to do the opposite of what an investor wants to achieve. The mistake made by many investors is assuming that ETFs trade like stocks, and they need a 'safety cable' added from above to keep them from falling through the floor because of bad news.

We have also tested each of our quantitative models by adding dozens of settings of Stop-Loss Orders, and generally speaking, Stop Losses cause reduced profits - sometimes dramatically so – in every test. We firmly advise subscribers to NEVER add a Stop-Loss Order to the ETFs recommended by their ETFOptimize strategy.

For additional reading on the impact of Stop-Loss Orders on our ETF-based models, see this blog article, "How Stop-Loss Orders Cause You Losses."

Why ETFs are Superior to Individual Stocks

We find that the subscribers who sometimes have the most difficulty in using the ETFOptimize strategies are the investors who have the greatest experience and the longest time in the markets. You might wonder, "How could this possibly be true?" It's because the investors who have the most experience almost always have a background of using individual stocks as their primary investment vehicle. But ETFs – which is what ETFOptimize uses exclusively in our models – are (by design) very, very different from individual stocks.

It might be helpful to draw an analogy to a fine craftsman who has spent decades working with his hands, using a single set of tools on his materials. For example, let's say that this craftsman builds custom, sculpted furniture out of expensive marble. He has spent many years using the same set of sculpting equipment, often repeating the same movements over and over, often thousands of times, to finesse the face of the marble to fit his wealthy client's imaginative design.

With these repetitive motions while holding the same tools for many years, his hands naturally toughened up in certain areas. He developed calluses on certain fingers and specific areas of his palms from all those years of repeating the same movements and processes with the same equipment. Then, when he received his new, advanced tools that were supposed to make his work so much easier – instead, initially, his hands became raw, blistered, bloody, and racked with pain. The new tools were hurting him – even though they were far superior to what he had used before – but it was because he was handling them incorrectly – using the same habits he had developed while using his old tools.

Similarly, after years or decades of experience with individual stocks, seasoned investors have often built up behavioral 'calluses' and emotional 'tough areas' – that make them prone to making mistakes with ETFs – products that were specifically designed to be far superior to individual equities and mutual funds.

ETFs Created to Solve the Problems Inherent to Stocks and Mutual Funds

For example, it is all too common for individual company stocks to experience "mid-week selloffs," which is what is prompting our customers questions about this concern. These mid-week selloffs can occur based on an earnings disappointment, a CEO unexpectedly leaving the company, the FDA decline of a drug application, an Attorneys General charge of stock fraud, a class-action lawsuit over a harmful product, or a dozen more items any of us could think of that fall under the heading of 'individual company risk.'

If you have invested in individual companies in the past, then you have almost surely been bitten by one of these disappointments that cause a stock's price to plummet – it's practically impossible to avoid. However, Exchange Traded Funds (ETFs) don't have this problem because ETFs were designed from the start to solve almost all of the most critical flaws in owning publicly traded companies.

ETFs eliminate individual company risk, eliminate the problem of the prices in thinly-traded, low-volume stock shares being affected by a sizable purchase, eliminate the behavioral biases inherent in selection of individual stocks by both amateurs and professionals, eliminate the problem of opaque holdings by mutual fund managers, and many other advantages – all designed when ETFs were created to eliminate the difficulties with investing in individual companies and mutual funds.

ETFOptimize strictly uses ETFs as our investment vehicle of choice. With our strategies, your hard-earned money is always invested in the shares of dozens, hundreds, or even thousands of individual companies that are collectively represented by a single share of the ETF that holds those many companies. Owning an ETF provides you with instant diversification, and there's no need to worry about the individual company risk that has harmed so many investors over the years.

If some unusual event happens to influence one, two, or even a dozen stocks, it will never bring down the entire ETF that holds those shares – while combined with the shares of tens or hundreds of other healthy company stocks. By holding the shares of all those individual company stocks, ETFs protect you with ample diversification.

Moreover, ETFOptimize carefully selects the ETFs that comprise the universes chosen for our strategies. All equity ETFs used are ranked 5 of 5 by FactSet using their measurement that indicates the ease of trading a $1 million block of the ETF.  Moreover, we hand-screen each ETF to make sure that it has adequate diversification across the companies it holds. This manual screening ensures that no single company in an ETF can drag it down, single-handedly making the ETF prey to individual company risk.

To repeat, ETFOptimize subscribers need not worry about big, mid-week selloffs.

To learn more about the advantages of ETFs over individual stocks and mutual funds, please see this article in our Introduction Section, titled "Why ETFs are Today's Investment of Choice."

 

 

WHY WE USE WEEKLY PRICES/INDICATORS ETFOptimize uses WEEKLY stock charts and WEEKLY indicators under almost all circumstances. Many traders, who are used to seeing daily charts and indicators don't understand the reason why we would use what seems to be a slower, less sophisticated practice. Many traders believe that using faster-paced daily prices will result in more accurate trades and higher performance. Our reasoning is not complicated: Weekly Closing Prices eliminate the vast majority of random noise that occurs in stock prices during the week. Using weekly closing prices and indicators, accompanied by weekly trades, results in tremendously improved accuracy and profitability from our quantitative investment strategies. This is not a conclusion based on opinion or speculation. All of our strategies, composite indicators, individual factors and formulas, ranking systems, and ETF universes are based on evidence-based testing completed over the last 20+ years – since our firm's founding in 1998. Moreover, our strategy designers have more than 50 years of combined experience as professionals in the investment industry and designing rules-based investment models. The weight of the evidence is clear; weekly prices provide greater accuracy in selection, and a higher-probability that trades will be profitable and will produce superior performance to a comparable model using daily prices. Weekly assessment doesn't mean weekly trades:  Even though our strategies use weekly prices and assess conditions on a weekly basis, that doesn't mean that they make weekly trades. Our models actually have an average hold time of 5.48 months per position. The chart below shows the average hold-time for positions in each of our individual Premium Strategies:   The ETFOptimize Premium Strategies are built by investors for investors, and we will never be pressured by short-term traders to serve the hyper-paced needs of those individuals.

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Not Yet an ETFOptimize Strategy Subscriber? Subscribe Today and Try a Model for the Next 60 Days - RISK FREE! The ETFOptimize Premium Investment Strategies have a proven track record of consistently high-performance success over long periods. Our premium model strategies have provided an average Annual Return of 30.53% since their inception – which is a multiple of more than quadruple (415%) the long-term Annual Return of the S&P 500, and more than eight times more than the index' return since 2000. The ETFOptimize strategies have never experienced a money-losing year, and collectively, have recorded 77 of 77 consecutive winning years! One example of a Premium Strategy that were proud of is our Adaptive Equity+ (2 ETF) Strategy, which has an Annual Return since Inception of about 40%, an Annual Return in the last three years of 64%, and a 2019 Annual Return of 76%. Moreover, its Maximum Drawdown is just -7%, and it has a Risk-Adjusted Return (Sharpe ratio) of 2.58. So the model's performance is improving each year. Here's the Adaptive Equity+ (2 ETF) Strategy's chart since inception:   The Adaptive Equity+ (2 ETF) Strategy provides exceptional returns with very minimal drawdowns. The ETFOptimize strategies operate using our proprietary, quantitative financial-analysis programming that has been continuously upgraded and refined over the last 25 years, accompanied by the highest-quality, point-in-time investment and economic databases. As ETFs have become increasingly popular over the last 20 years, we've embrace these products, which offer investors instant-diversification – eliminating the individual company risk inherent in stocks. Why not look over our strategy lineup now and see which if there's one that's a fit for you? It's actually very affordable to put a high-performance, quantitative investment strategy to work for you every week of the year. The ETFOptimize models are available by subscription starting at just $9.95/mo. We even offer a Free strategy for those who would like a long-term, 90-day trial before subscribing (with no credit-card required). Do some research; we don't think you'll find a superior approach to investing – offered at such an exceptionally low cost, and making consistently high-performance investment results affordable for even the smallest investor. You control your money in your own account and follow our clear instructions for trades, which occur an average of only about three-six times per year. We provide you with weekly updates of your strategy and an analysis of the market that always tells you what's critically important. Plus, you can subscribe without risk because each model is backed by a 60-day, 100% Moneyback Guarantee if you decide that algorithmically based strategies are not your cup of tea. Our firm, Optimized Investments, Inc., and website, ETFOptimize.com, have an A+ Rating with the Better Business Bureau and a perfect record of satisfied customers – zero complaints – since the BBB began reviewing our firm, which was founded in 1998. Take a moment to sign up for the strategy of your choice now – while all the benefits of a quantitative approach are fresh in your mind. You can get started for less than 50-cents a day with a very low-risk, high-profit investment strategy that produces solid performance through thick and thin – in any type of market environment. Moreover, remember that you have nothing to lose – if you change your mind anytime in the first two months – for any reason (or no reason at all) – just let us know and we'll return every penny you paid! Visit our ETF Investment Strategy Suite today and select a quantitative strategy perfect for you: Visit our  ETF Investment Strategy Suite