A Method Proven to Beat 82% of Investors

[sgtnichols]

Greetings fellow TSPers!

Realizing my plans usually underperform the market, I switched to a set-it-and-forget-it strategy of 60S/40C. This low-stress approach to investing is doing pretty well, placing me among the top 13% of folks on here so far this year; #198 in 1592 members.

My performance this year rhymes with the following quote and is to be expected. Investment in actively managed accounts is plummeting after reports pointed out that active managers can only beat the market consistently about 5% of the time:

"Over the longest span, the numbers were particularly brutal. The S&P 500 (C Fund) outperformed more than 92% of large-cap funds over the last 15 years. Mid- and small-cap funds fared no better over the time period, with their benchmarks (S Fund) besting them 95.4% and 93.2% of the time, respectively.

Overall, 82.2% of all active funds were outperformed over the 15-year period.

Source: Fortune Magazine, 2017
https://www.google.com/amp/amp.timeinc. ... tual-funds

Take a moment to compare your performance over the past few years against the C and S funds. If you have underperformed those benchmarks, you may want to rethink your stategy. Maybe you need to accept that you are unable to get the returns you thought you could and now need to contribute more each month. That's okay. Just consider adjusting your approach.

As an engineer, before committing to this strategy I ran thousands of simulations trying to pick the optimal MACD, RSI, STO, etc. settings for a technical active trading system. Can you guess what happened? I actually had to force my simulations to not converge on a buy-and-hold strategy. That simulator took weeks to make... What a buzzkill.

It makes sense though, right? The world's population has been slicing and dicing this stuff for decades so there should not be an optimal active trading strategy that works in the long term. You win by knowing something the other guy does not, by pushing massive numbers of investors around with targeted news, or like I do... Just by passively sitting on the sidelines watching, banking on the idea that investors will continue putting money into the game. It's a smart play: most of us need at least a million dollars to retire, the market offers the best returns, and our government and workplaces encourage all of us to put skin in the game.

If you need help sleeping, I recommend reading "A Random Walk Down Wall Street". A technical and dense read, Malkiel supports passive investing for retirement accounts, as do the findings presented in "Millionaire Next Door", "Common Sense on Investing" (Bogle), and my favorite money guru Dave Ramsey from "Total Money Makeover". They are also all very careful to point out that regular and high contributions have a much bigger impact on your comfort in retirement than IRR. Successful people spend much less than they make and use the rest to invest.

Supporting Article:
https://www.spglobal.com/our-insights/S ... ecard.html

[userque]

...It makes sense though, right?

Yes and no.

Yes, insofar as (given how the problem is framed) buy and hold will be the 'best' conclusion for that dataset--for such a setup.

No, insofar as more effectively framing the problem (cost function), with more effective features (inputs--raw and derived), and more effective training, applied to a more effective algorithm, will result in simulated trades that will greatly beat buy/short-and-hold.

Most 'out of the box' neural-network type of machine learning algorithms, when given several years of basic data (OHLC) will simply want to just buy-and-hold, or short-and-hold.

Same holds true for simulating via optimizing (non-dynamic) 'out-of-the-box' technical indicators--which is what you seem to have done: grid search optimization.

As with humans, an algorithm will be unsuccessful at trading without the proper training, tools, and core algorithm.

[rcozby]

...It makes sense though, right?

Sorry, sarge, I gotta go with a no on this one.

Technical indicators are simply a function of the metric and time period chosen. For example, C/S B&H was a no-brainer for 2017...in hindsight. This year, not so much (so far, at least).

Macro Fundamentals really do matter, especially for TSPers who have no choice but to play across a very few huge subsets over the overall investment market. We can't ignore the fact that the Fed is no longer printing money and lowering short term rates. Rather, they are burning money and raising rates. This Does Affect Stock Prices. And Bond Prices. Negatively!

What worked in the past will not work in the future. And the converse may also be true. It may, in fact, become easier to beat the market in this type of environment, simply because the overall market is gonna get pretty ugly going forward.
https://www.cnbc.com/2018/05/25/to-beat ... stors.html

Being in the top couple hundred amongst this crowd is definitely a good place to be, so congrats on that. But take a look at the Top 20 and notice how many are in G. As David Tepper notes via quotes on this site, there is a time to make money and there is a time not to lose money. We have entered the zone of the latter.

[Scarfinger]

But take a look at the Top 20 and notice how many are in G.

Only 2 are in the "G" if you go by account balance.

Only 1 if you go by 360 days

About 7 or so if you go by calendar year

It looks like the 60/40 stocks is good the farther out you look. Kind of like the OP is suggesting. Its sound advice for those not interested in active management of their TSP.

[rcozby]

It looks like the 60/40 stocks is good the farther out you look. Kind of like the OP is suggesting. Its sound advice for those not interested in active management of their TSP.

The OP recommends 100% stocks for long-term buy & hold. Seems excessively risky to me in the current environment, but I recognize that risk tolerance is a personal thing.

[sgtnichols]

Thanks to you all for voicing your opinions and contributing to the discussion.
I am 35 and do not have the benefit of your years of investing experience. Yes, I have taken a risky posture. At my age, it makes sense as I have more time to recover and need to get over my fear of the market early in life to avoid letting emotions screw up my tactics later on when it really counts.

Looks like scarfinger might be one of those top 15%ers I keep reading about and got some really nice wins in!! Nice work with that - you have much to be proud of! Not to criticize anyone, but if I stacked up gains side by side and compared them to the C fund everyone who replied so far would lag a passive strategy - some of you quite a bit. That makes sense, because not everyone here has the high risk/reward tolerance I have. When I get closer to retirement, you'll see me locking a percentage away in the F fund like the rest of you for safe keeping. Put yourself in your shoes at my age - what would you have done differently?

Now in fairness, when things are really bad the active folks do a good job of protecting themselves against losses and can profit pretty well from it. Last year I found myself checking in a few times a day - not very productive when you're on the job and not something the wife was very keen of losing my attention to. Did okay I guess, but sure felt unproductive once I compared myself to the C/S fund benchmarks. 60/40 was no accident by the way. I compared a few different mixes and that one had the best historical returns over the period I examined. Never liked the I fund - too risky IMO. Sure wish there was a Chinese index fund in TSP. $MCHI and $CXSE are really kicking butt!

[TSP Jedi]

1. Charts
2. Chande Momentum Oscillator
3. Focus mainly on the WEEKLY charts
4. Buy the -50 sell the +50
5. Gains

[sgtnichols]

1. Charts
2. Chande Momentum Oscillator
3. Focus mainly on the WEEKLY charts
4. Buy the -50 sell the +50
5. Gains

Thanks jedi. How have you fared with that strategy the past few years compared to the S&P 500?

[Scarfinger]

Put yourself in your shoes at my age - what would you have done differently?

Great question... I would have started to save for retirement. I am 50 now but I didn't even start saving until I was 40 years old.

I could have started at age 30 but, I thought I needed every dollar to get by.

Two of my co-workers are switching to a buy and forget it strategy because they are young and don't like change funds around. They are going 70 "C", 15 "S", 15 "I" or maybe it was 70 "S" 15 "C" and 15 "I"

As long as they are invested and NOT banking it away in "G"... they should be ok in 30 years.

[userque]

Put yourself in your shoes at my age - what would you have done differently?

...As long as they are invested and NOT banking it away in "G"... they should be ok in 30 years.

A common belief. But it assumes that past performance guarantees future results. How can we know that the market won't be in a tight chop for the next 30 years ... or worse?

[Scarfinger]

A common belief. But it assumes that past performance guarantees future results. How can we know that the market won't be in a tight chop for the next 30 years ... or worse?

LOL. You sound like one of my co-workers. She had all her money in "G" fund for the 7 years because of those same thoughts. So she basically missed out on the long lasting bull run.

Last year I convinced her to invest it in the L2050. She made around 15% vs "G" fund 3%.

If you believe the US will not exist by the time you retire? Then sure put it in "G" or don't invest at all. Keep it under the mattress. Some people are making this harder than it needs to be.

Put it in an "L" fund and it will transition your money to safer investments closer to retire.

At minimum, just start saving.

[userque]

A common belief. But it assumes that past performance guarantees future results. How can we know that the market won't be in a tight chop for the next 30 years ... or worse?

LOL. You sound like one of my co-workers. She had all her money in "G" fund for the 7 years because of those same thoughts. So she basically missed out on the long lasting bull run.

Last year I convinced her to invest it in the L2050. She made around 15% vs "G" fund 3%.

If you believe the US will not exist by the time you retire? Then sure put it in "G" or don't invest at all. Keep it under the mattress. Some people are making this harder than it needs to be.

Put it in an "L" fund and it will transition your money to safer investments closer to retire.

At minimum, just start saving.

Just to be clear regarding my recent post: I'm not advocating putting money in the G fund (or any fund) and forgetting it. Nor am I advocating for or against any particular fund. So I don't think I sound like your coworker.

I am also not forecasting the health (or existence, or non-existence) of the US in 30 or so years. I am also not advocating that 'it be put under the mattress.'

Again, I am simply and only stating that it is a common assumption that the US market will continue going up, generally, over the next 30 or so years. While, at the same time, it is also a common assumption that past performance is no guarantee of future results.

[mindofmush]

Put yourself in your shoes at my age - what would you have done differently?

...As long as they are invested and NOT banking it away in "G"... they should be ok in 30 years.

A common belief. But it assumes that past performance guarantees future results. How can we know that the market won't be in a tight chop for the next 30 years ... or worse?

This is a first: somebody saying past performance GUARANTEES future results.

Even the G fund rate isn't guaranteed after Congress gets done punishing federal employees for saying they liked their job in that 2017 survey.

[Scarfinger]

So I don't think I sound like your coworker.

How can we know that the market won't be in a tight chop for the next 30 years ... or worse?

It was this line that made me think of her. Particularly the "or worse". She is always thinking this way and as a result of her negative/fearful attitude... She only felt comfortable investing in the "G" Fund.

I am not a financial adviser but I would bet 99.9% of FA's would recommend taking MORE risk if you have a long time frame to invest. They always throw in the diversification line too.

Look on the bright side..if the market tanks for the next 30 years...you will be buying in on the cheap.

[userque]

So I don't think I sound like your coworker.

How can we know that the market won't be in a tight chop for the next 30 years ... or worse?

It was this line that made me think of her. Particularly the "or worse". She is always thinking this way and as a result of her negative/fearful attitude... She only felt comfortable investing in the "G" Fund.

I understand how you could confuse us.

I simply acknowledge that markets go up and down. But in doing so, I'm certainly not expressing fear. (It's been years since I've traded with emotion.) In fact, failure to acknowledge the obvious is a sign of fear, imo. Similar to the "to the moon" calls made on many sites. "US markets to the moon!"

I didn't suggest, as many do, that over the long time span, the US markets must be higher. Instead, I hinted that we have no way of knowing where we'll be in 30 years. So I wouldn't feel comfortable telling coworkers that they'll be fine in the long run if they simply buy and hold equities. Personal opinion is all.

Considering the difficulty in forecasting a few days, or several days ahead; I can't imagine issuing, or believing a 30 year forecast.

To the moon for the next 30 years?:

I am not a financial adviser but I would bet 99.9% of FA's would recommend taking MORE risk if you have a long time frame to invest. They always throw in the diversification line too.

Yes. I agree with her taking more risk. But, the original discussion is about setting, and forgetting for 30 years.

Look on the bright side..if the market tanks for the next 30 years...you will be buying in on the cheap.

Oh no. I trade. No dollar-cost-averaging for me. I'll still be trying to catch swings.

Full Disclosure:

I would probably also hypothetically advise your friend to use an allocation that I would formulate based upon all available historical data...as you have somewhat done. But I would also include giving her a simple entry and exit strategy. Such a strategy must be easy for someone of her skill set to implement; and must be slow acting to avoid whipsaw. The sole purpose would be to protect her from a scenario where the market meanders or falls long-term, within the next 30 years.

I haven't given this much thought, but an example could be where she could look at her TSP statement (and/or the website) and after a certain level of negative performance of her balance (or of a particular fund), enter G; and then after a certain level of positive performance (or a certain amount of time), re-enter the initial allocation.