With multiple high-performance investment strategies to choose from in our ETF Investment Strategy Suite, how do you select the one that's right for you? After all, you are going to be following this strategy's guidance for weeks, months, years – even decades to come. While you can change your strategy twice during your subscription, it is best to choose the one that's appropriate for you from the start and STICK WITH IT. Consistently following your strategy's recommendations to the letter is the one thing you can do that will nearly guarantee your success.
We would love to sit down with you over a cup of coffee, delve into your finances, and recommend a strategy that will be perfect for your situation. However, in providing an internet-based service that's available to the public, simply as a matter of logistics we are unable to meet or even have a telephone conference with each of the thousands of subscribers who are anxious to get the exceptional, systematic returns available from the ETFOptimize strategies. Also, from a legal standpoint, members of the staff of ETFOptimize.com our not licensed as Registered Investment Advisors, and therefore it is illegal for us to provide personalized strategy recommendations for you.
Neither of us want to cross swords with Federal law, so we have developed an alternative, straightforward and simple approach to guide you through the selection of a strategy with which you can be consistently successful over the long term. We cover that method on this page.
First, we would like to provide you with a little background, so you understand the key challenges that all investor's face, then we'll discuss the system that we hope will help you make the appropriate decision that will overcome those challenges.
A Counter-Intuitive Success Formula
Individual investors often hold the impression that the world's richest, most successful investors have their fingers on the pulse of virtually every factoid in the financial world every minute of the day. They visualize a scene where that person is conducting a symphony of resources, utilizing an in-house research team, getting instant messages from expensive financial news agencies, phones abuzz with insider tips – something akin to the 'Gordon Gecko' character in the 1980s Wall Street movie, with the protagonist making rapid-fire decisions and barking trade orders to obsequious manservants from his penthouse office.
In fact, that scene is a highly glamorized way that some professional investors operated long ago. To be a discretionary investor implied the necessity of being aware of the most important factors that could affect each of the stocks in your portfolio(s). For any given company, that meant perhaps a dozens different key factors that could affect a company's business prospects. And imagine if you had a diversified portfolio of 20 or 50 stocks!
However, today's reality is far afield of the nightmare of being a discretionary investor in the 'old days,' or the exhilarating movie plot depicted in 'Wall Street.' Instead, today's most successful investors recognize the fact that behavioral errors are unavoidable – no matter how much experience they may have.
Bad decisions naturally increase when matters of money are involved because decision-makers are consciously or unconsciously swayed by a number of money-related human emotional biases. There is even a well-developed field of study for these money-related errors, called "Behavioral Economics." For this reason, today's highly successful investors systematically remove themselves as much as possible from the investment decision-making process.
Many prosperous investors correctly reason that the fewer investment decisions they have to make, the fewer potential money-losing mistakes will be made. Savvy investors also know that even if they are able to consciously avoid a smorgasbord of easily identified miscues, their subconscious will often affect their decisions in ways they may not even realize until much later. For this reason, successful investors try to minimize the hands-on decisions and will maintain an emotional distance from their trades.
This approach often uses a 'systematic' or 'quantitative' investment method – in which a computer is programmed to sift through thousands of data points and make the tough investments decisions for you. These decisions are based on sophisticated programming that typically has had thousands of man hours devoted to its construction and optimization.
Of course, not everyone makes their own investment decisions. Historically, the most prevalent way for people to save for their future has been through the use of mutual funds. However, with mutual funds you are handing those important investment decisions over to a proxy decision-maker, a person who you hope will make the best decisions on your behalf. Unfortunately, these people are human too and make just as many mistakes as the average amateur investor.
In fact, the performance of mutual fund managers in pursuing their profession, i.e., active stock picking, might be more miserable than what you might expect from a rank beginner. In any given year, less than 50% of mutual fund managers will outperform the market and 98% underperformed the market over the last 20 years. Of the small number of mutual funds that beat their benchmark over three consecutive years, only 5% are able to repeat it the following year or in any of the subsequent 10 years. It's been said that mutual fund managers have the least successful profession in the world, and, well... you really can't argue with facts.
Buffett and Bogle's Recommendation to Investors
The inability of mutual fund managers, investment professionals, and other human beings to attain returns that at least match the market is one of the reasons that millions of investors are taking the advice of investing luminaries such as Warren Buffet (one of the richest men in the world) and John Bogle (retired CEO of Vanguard Group).
These famous investing personalities have persistently admonished the public for years with one clear message. They firmly advise retirement and other savers to avoid active stock selection – either done themselves or through a mutual fund – and instead recommend that investors embrace low-cost, passive, index-based investments, such as the index-tracking products inexpensively offered by Exchange Traded Funds (ETFs).
Whether or not Buffett and Bogle had any influence is debatable, but there certainly are a massive number of investors moving their funds away from stocks and mutual funds and into ETFs. In fact, passive, index-based ETFs are so popular today they are expected to attract more than a trillion dollars of new investment dollars in 2018, with much of that money coming out of mutual funds and individual stocks.
The move away from individual stocks and expensive mutual funds and into passive investing using ETFs is unquestionably the most significant trend in the history of the investment industry. In fact, it's one of the largest transfers of money in the history of mankind – with more than $1 trillion going into passive approaches in 2018 and the pace of ETF growth, which is the most popular tool for passive investing, at 20% per year and accelerating! Rest assured that if you are already investing using ETFs, or are ready to get started with ETFs, you're on the right side of history.
The Rise of Systematic Investing
With the advent of high-speed, powerful computers, increasingly sophisticated software, and high-quality economic and financial databases, the age of quantitative selection of stocks and ETF's has arrived with force.
In fact, perhaps the second most significant development in the investment world is the migration to
Systematic Investing – replacing discretionary stock-picking, which dominated investing for over 200 years. Since the turn-of-the-century, a large percentage of assets under management has flowed into quantitatively managed funds, driven primarily by the superior performance of these funds over traditional funds with discretionary management – and it's been predicted that within five years every hedge fund will be a systematic process-driven fund.
Systematic (or 'quantitative,' 'rules-based,' etc.) investing eliminates much of the stress and error that is inherent in discretionary, individual stock selection that is responsible for much of that approach's failure. The use of algorithmically driven investment approaches provides dramatically improved consistency and improved overall performance. Also, a great deal of time is required to monitor factors affecting stocks (such as interest rates, earnings trends, etc.) and review dozens of companies to narrow the selection down to a reasonable few candidates. But by allowing a carefully crafted quantitative investment approach to make all the decisions, this time is freed up for the investor. Many investors comment that they are also relieved of the sometimes intense stress associated with making decisions that dramatically affects their finances.
What is unique about the strategies offered by ETFOptimize is that we combine each of these highly beneficial trends: merging Systematic Investing and
Exchange Traded Funds (ETFs) to create an investment approach that is nearly impossible to beat. For example, our strategies have never had a money-losing year (57 of 57 consecutive years) and have beaten their benchmarks in 54 of 57 (94.7%) years – with an average outperformance of 21.86% per year. See more details on the performance of the ETFOptimize strategies at this link.
The ETFOptimize strategies accomplish this outstanding record while providing an annualized return that is quadruple that of their benchmarks and the S&P 500 S&P 500 while reducing max drawdowns to less than 30% of the max drawdowns of the market! So much for being unable to outperform the market! In the case of ETFOptimize, it is the norm!
The Critical Weakness in Our System
The result of consistently using our strategies is extraordinarily high annual performance with dramatically reduced risk. Our objective is to offer strategies with performance charts that steadily climb at a 30-45° angle – regardless of the market environment – whether bullish, bearish, or sideways and volatile. If an investor stays with a systematic strategy's recommendations – to the letter – the results can be phenomenal.
The weak point in our approach? The weakness is that our system relies on the user to execute the trades as recommended by their strategy!
While the ETFOptimize strategies can provide an investor with a carefully crafted, sophisticated, and powerful decision matrix that calculates billions of data points within seconds each week to determine the most profitable asset class and individual ETF to own at any point in time, if the user doesn't execute the trades as recommended, the system will fail. Or... more accurately put; the user will fail the system.
What could cause a person to not follow their strategy's recommendations to the letter – when they know the outstanding outcome that will accrue to them if they do follow the recommendations? We find there is one, overarching reason that subscribers veer off the carefully designed path of their strategy and into the weeds, even if they are properly motivated and have excellent self-discipline. This is also the primary cause for the average investor to attain a long-term annual return of just 2.6%. That malicious foe is Market Volatility.
The Threat of Volatility
How an individual responds when market turbulence increases is, perhaps, the most consequential factor in determining their investing success. No less an investment superstar than Warren Buffett, who transformed a $500 stakehold at the beginning of his career into more than $80 billion today, has said that the crucial factor in his success is not a superior intellect or an exceptional education – it is his temperament.
"An investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behavior from the super-contagious emotions that swirl about the marketplace."
However, for the rest of us investing mortals not named Warren Buffett, if we can avoid the downside volatility of the market that can regularly cause bad decisions which can decimate our account, it can provide a significant barrier to these bad decisions – and that's exactly what the ETFOptimize approach provides. The ETFOptimize strategies have significantly lower maximum drawdowns – about one third of the maximum drawdowns of the market – and very high
Consistently Avoiding Behavioral Errors
What's needed is a reliable system that will help us deal with market volatility and subjugate these innate behavioral errors before they occur.
The foundation of that system is provided by the ETFOptimize quantitative strategies, which identify times of increased market risk and will exit to a cash-proxy or defensive ETF when appropriate for the strategy. Other strategies sell their long-oriented assets and purchase defensive ETFs or even inverse ETFs to profit during a lengthy downturn. These systematic decisions are based on fundamental economic and market indicators that have a very high historical correlation to market changes and the subsequent trends.
The first step is using a quantitative ETFOptimize strategy for all investment decisions. The ETFOptimize Strategies have FAR LESS downside volatility and lower maximum drawdowns than their market benchmarks. On average, our strategies reduce maximum drawdowns to less than one-third of the S&P 500's drawdowns over the course of a strategy's history since inception.
In addition to using the ETFOptimize strategies, we recommend the following second review, which requires a bit of introspection:
An Important Tool
While the ETFOptimize investment strategies will provide you with exceptional performance and minimal drawdowns compared to the market, there will still be times when volatility can appear to be excessive. For the average human, getting this impression from your investments is nearly unavoidable – unless you want to put your funds in a money-market account (at about 0.8% interest) or some other vehicle that pays nearly nothing.
Of course, volatility comes in the upward as well as the downward variety. But when a stock or ETF takes off with sharply higher gains, most people consider that type of volatility to be beneficial and would probably be bragging to their friends about their great investment choice that just shot skyward and made them a lot of money.
Because upside volatility will almost never prompt an investor to abandon their strategy, we consider downside volatility to be the most critical measure of a strategy's 'riskiness' for investors. Only during downside volatility are investors prone to capitulating; abandoning their strategy's recommendations and going to cash – an all-to-common decision that locks in the downturn and turns paper losses into an actual loss of assets. This is what the industry calls risk.
We use a well-regarded measure of an investment's downside volatility, called the 'Sortino Ratio' to rank each of our strategy's risk levels. We recommend that prospective subscribers self-analyze their tolerance for downside volatility and choose the strategy that they think they can live with when market conditions get volatile.
We use the Sortino Ratio rather than the more well-known Sharpe Ratio, which measures an investment's return relative to ALL of its volatility – both upward and downward. That's because there really aren't too many investors who would protest high upside volatility. Downside volatility is the bogeyman that we wish to avoid, as measured by the Sortino Ratio.
While our strategies will never decline over the long-term as much as the market (because they are assessing conditions each week and adjusting ETF positions appropriately), on a short-term basis the strategies can experience sharp volatility - sometimes even more than the market. This higher temporary volatility can occur because during bullish conditions, some of our strategies may be holding leveraged (2x) ETFs. If there is a short-term correction of overextended prices, the strategy will stay in the long-leveraged ETF position because that choice is based on underlying fundamentals and not short-term price fluctuations.
Using A Strategy's Sortino Ratio For Guidance
All of us, including veteran professionals, are at risk that money-related emotions will overcome us at the worst time, causing us to pull money out of our quantitative strategies when market turbulence increases and we see our holdings take a temporary downturn. For this reason, we recommend that individuals with a limited amount of investment experience should avoid strategies with higher downside volatility.
One way to identify strategies that are 'safer' concerning downside volatility is by checking the strategy's Sortino Ratio. The Sortino Ratio measures an investment's total performance relative to its downside volatility (with higher values being better).
Our strategy with highest Sortino ratio (i.e., least downside volatility/risk) is listed on the top left of the Strategy List in our ETF Investment Strategy Suite. At the time of this article's most recent update, the least-risk/highest Sortino status goes to our "Fixed Income Rotation-1" strategy. Fixed-income investments have very low volatility, but also comparatively low annual return percentages (at about 14%) when likened to other strategies that include equities. Note that our Asset Allocation strategies combine Equity ETFs and Fixed Income ETFs to make a diversified, smoothly-climbing portfolio in any market environment.
The Sortino ratio of each strategy decreases slightly from left to right, line-by-line. As their Sortino ratio declines, it indicates a slight increase in risk (downside volatility). The strategy that currently has the lowest Sortino ratio (most relative downside volatility) is currently the S&P 500-Aggressive Strategy, which has a Sortino ratio of 2.14 since inception. Keep in mind that our strategies are designed to dramatically reduce downside volatility, and this is reflected in our strategy with the lowest Sortino ratio. as a comparison, the S&P 500 has a Sortino ratio of 0.57! You can select a strategy and read extensive details of its performance, historical drawdowns, and risk measurements by clicking the "Description" button near the top of each strategy's Preview Page.
Assistance with This Article
If there is anything discussed on this page that needs clarification, please contact us at your convenience. However, please be aware that by law, we are NOT allowed to offer you advice on the strategy that is appropriate for you – or any other aspect of your financial situation. In fact, we don't want you to tell us anything about your financial situation.
Please don't take this as rude – we just want to be sure that no one breaks the law. No member of the ETFOptimize staff is a licensed financial advisor. If you need personalized financial advice, please contact a Registered Investment Advisor (RIA) – a professional that is required to act in a fiduciary capacity on your behalf. We are happy to answer any questions your RIA or other professional may have about the ETFOptimize strategies. And we're happy to help you, as long as your questions do not include anything about your financial situation!
Don't forget to view our article showing how you can become a MULTI-MILLIONAIRE using an ETFOptimize strategy!
Note: All ETFOptimize Strategies have FAR LESS downside volatility and lower maximum drawdowns than their market benchmarks (on average, our strategies reduce maximum drawdowns to less than 1/3rd of the S&P 500's drawdowns over the course of a strategy's history). Drawdowns are the peak-to-trough percentage decline of a portfolio or investment during a downturn.
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