Q: I have been pondering over what portion of portfolio goes to stocks and what portion goes to ETFs/mutual funds. I've noticed that the TQQQ performance (103%) dwarfs many of the high octane stocks: ARUN (72%), ARMH (72%), NFLX (54%), PCLN (52%), BIDU (47%) since 9/1/10. Given O'Neil's success rate is 50% at best, and given the strong correlation between stocks and market indices, do you still think that the average investors can pick stocks and outperform 3x ETF trading based on MDM? In addition, as cited by AAII, the CANSLIM's 2,763.3% over 12 years span (1998 to 2009) is theoretically not much better than your 741% market timing with QQQQ in the past decade if you substitute 3x ETF for the Qs, and then annualize the returns. Of course, both of your performances in late 1990s were outstanding. But the late 90s was an unusual time. What's your thought on the matter?
A: We are in an anomalous period driven by quantitative easing. This means the market averages tend to find their bottoms very quickly then move to new highs. Thus, since March 2009, the performance of a 3-times ETF such as TQQQ is tough to beat since the major averages continue to steamroll higher, with setbacks limited to within -10%, not counting the period from May to August 2010 when quantitative easing was not employed.
As for returns with the market direction model, the average annualized returns using the NASDAQ Composite are about 33% per year, or roughly 3 x 33% per year using a 3-times ETF. Since Jan 2005, the market has been more challenging which has reduced average annualized returns for virtually all models. A discussion with average annualized returns is shown here:
https://www.virtueofselfishinvesting.com/faqs/answer/How-has-Dr-K-MDM-systematic-model-done-against-some-of-the-best-timing-sites-on-the-internet (see the table showing returns starting from January 2005)
Since Jan 2005, the model returned 17.3% using no leverage, considerably less than its 33%+ annualized return. This 17.3% return would have been roughly a return of 3 x 17.3% using a 3-times ETF.
Note, keep in mind that drawdowns are also 3-times what they would be using just a 1-times ETF such as QQQQ, thus to achieve big returns using the model, the drawdowns could potentially exceed one's risk tolerance.
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