I have certainly been disappointed with the performance of my Ports. Much of the underperformance was caused by the 3 market timing whipsaws since they were launched. For example, the 3 whipsaws in my R2G SmallCap Port ( https://www.portfolio123.com/app/r2g/summary/1045239 ) were June 24 > July 15, 2013; Oct. 14 > Oct. 21, 2013; & Oct. 20 > Oct. 27, 2014. During these 3 periods my port was in cash the S&P 500 gained 6.96%, 2.2%, & 4.26% respectively for a total of over 14% lost gain for the R2G Port. The effect of the whipsaws is even more pronounced than the missed S&P gains. After a quick check of the sell rules a few of the 5 stocks would not have been sold since launch. The 3 whipsaws caused 5 stocks to be sold and later replaced by 5 new ones 3 times causing extra fees and slippage expense while losing out on those stocks excessive gains.
My approach to develop a sound market timing system in 2009 was to avoid most of the >50% drawdowns of the S&P to save capital while not hurting annual return very much. In hindsight, we can see that the rules I developed then resulted in these small whipsaws that caused part of the Port underperformance since it was launched. There were also 3 small whipsaws in the Port between the time I developed the timing system in March 2009 and the launch of the Port in March 2013. They were in June 2009, Nov. 2011, & Dec. 2011. However there were also 2 times that the timing system saved significant losses in the same time period, a small saving of 3.5% in Oct. 2012, and a much larger savings of a 16.47% drawdown in July > August 2011.
The biggest cause of the underperformance is that for this ranking system, these value stocks need some time for additional momentum traders to buy in for the prices to really grow. The ranking system first finds pure value stocks and then looks for the beginning of investors &/or momentum traders buying in, moving the price and volume. When that occurs the Port buys the stocks and holds them until they have run their course by falling significantly in rank. However, when the stocks are sold too soon because of market timing, they don’t have time to grow.
The problem with any timing system that saves drawdowns during deep corrections and recessions/depressions, but loses small gains during small corrections due to whipsaws is that the subs only see the out of sample performance with their real trades. Since there has not been a deep correction, recession, or depression since the port was launched, the market timing rules are negatively effecting the out-of-sample performance compared to the S&P. That also causes most of the subs to bail to better performing Ports (I don’t blame them for that). If there had been a deep S&P drawdown (I don’t wish that on anyone) and the Port had saved all the subs a LOT of money, everyone would be applauding my conservative trading system. Alas, I am stuck with poor out of sample performance.
Another cause of underperformance is the ultra-conservative way P123 calculates the R2G Prices for buys & sells. P123 uses the Hi + Lo + 2*Close)/4 +or- slippage. That caused significant underperformance relative to buys & sells near the open, which is what my original Sim & Port were based on (before P123 changed the rules), and what I have discussed in the Forum over the years. The differences between running the Sim with next open, Avg of Hi & Low, or next close is significant. I re-ran the Sim starting on March 2013 (the date I launched the Port) through today. The total return using next open was 27.5% with a Max DD of -13.6%; the total return using Avg of Hi & Lo was 25.8% with a Max DD of -14.3%; and the total return using next close was 19.5% with a Max DD of -15.1%. So the excessive underperformance using next close vs next open is 8% in 21 months. I always buy and sell close to the open.
Now, if I re-run the Sim starting in March 2013 using next open AND turn of the market timing rules to remove the whipsaws (which also allows the Port to hold the stocks longer) The total return becomes 68.7% with a Max DD of -15.1%. That is more than three times the 22.8% total return shown for my R2G Port, and more than double the S&P since launch.
The bottom line is that this Trading System, minus market timing, significantly outperform the market during the out of sample period using next open instead of the P123 buy & sell prices. What I must do now is rethink the timing rules to reduce the whipsaws while trying not to significantly increase drawdowns during the recessions. That, is not a trivial effort without data mining.